South Africa: Restoring Confidence Top Priority Following Rating Decisions

Restoring business and consumer confidence and ensuring economic growth are government’s top priorities following the decisions of rating agencies Moody’s Investor Service and Standard & Poor’s (S&P).

“Restoring business and consumer confidence, and catalysing inclusive growth is the top priority of government. To this end, government is working urgently and diligently on practical steps to provide the necessary policy certainty, environment conducive to investment, and predictability that the country so desperately needs. Decisive actions in managing government expenditure and closing the revenue gap are critical for achieving sound public finances,” National Treasury said on Saturday.

This follows the two rating agencies’ decisions made on Friday night.

In its assessment, S&P lowered South Africa’s long term foreign and local currency debt ratings by one notch each to ‘BB’ and ‘BB+’. The agency cited weak real nominal Gross Domestic Product (GDP) growth that has led to further deterioration of South Africa’s public finances beyond the rating agency’s previous expectations.

In September, Statistics South Africa (Stats SA) released GDP figures that showed that GDP grew by 2.5% quarter on quarter in the second quarter of 2017. The growth meant that the country exited a technical recession following a contraction of 0.7% in the first quarter and a 0.3% contraction in the fourth quarter of 2016.

The credit rating agency on Friday however changed the outlook to stable from negative citing “that the stable outlook reflects their view that South Africa’s credit metrics will remain broadly unchanged next year; and [that] their view that political distraction could abate following the party congress of the governing African National Congress (ANC) in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilize public finances.”

Moody’s

Meanwhile, Moody’s gave South Africa some reprieve by maintaining the country’s credit rating above junk at Baa3.

The ratings agency placed South Africa’s long-term foreign and local currency debt ratings of ‘Baa3’ on a 90-day review for a downgrade.

The ratings carry a negative outlook.

According to Moody’s, the decision to place South Africa’s rating on review for a downgrade was prompted by a series of recent developments which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.

According to the rating agency, growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures.

The rating agency has further indicated that the review will allow it to assess the South African authorities’ willingness and ability to respond to the above rising pressures through growth-supportive fiscal adjustments that raises revenues and contain expenditures.

It will also look at structural economic reforms that ease domestic bottlenecks to growth and improvements to state owned enterprises governance in light of government exposures to contingent liabilities.

On Saturday, the government said it had noted the decisions and was mindful of the implications on the economy and investor sentiments going forward.

It further added that extensive engagements were held between all the rating agencies and government, both prior to and following the 2017 Medium Term Budget Policy Statement (MTBPS) that was tabled in Parliament by Finance Minister Malusi Gigaba, last month.

Improving public finances

“There can therefore be no doubt of government’s strong commitment to addressing the structural constraints to growing the economy and improving public finances. The Presidential Fiscal Committee (PFC) is seized with the task of restoring business confidence in the immediate term and executing decisively growth-enhancing measures previously announced.

“Speculative grade ratings have negative implications for economic growth, borrowing costs for the economy as a whole, state owned companies’ ability to borrow and the ordinary person on the street,” said National Treasury.

Treasury highlighted that in the MTBPS chapter on Fiscal Policy, it indicated that additional spending cuts or tax increases of R40 billion (0.8% of GDP), would be required from 2018/19, in order to stabilise public debt below 60% of GDP over the next decade.

Over the next two weeks, the PFC and Cabinet will consider a package of measures to this effect, to be implemented from 2018. Specific details on these measures will be announced in the 2018 Budget.

In an interview with SAnews earlier this week, Treasury’s acting Accountant General Zanele Mxunyelwa urged South Africans to work together to ensure the country’s full economic recovery.

She said government is further working on cost containment measures.

“We are waiting for them but we believe that [every] economy has ups and downs. We should all work together to make sure that our economy improves,” said Mxunyulwa.

The agencies’ decisions follow hot on the heels of Fitch Ratings’ decision not to further downgrade South Africa deeper into junk status. In its reaction to the news on Thursday, government said the decision affords the country an opportunity to address the issues it faces.

Fitch on Thursday affirmed South Africa’s long-term foreign and local currency debt ratings at ‘BB+’ and maintained the stable outlook.

Access to higher education

Meanwhile, government said measures are being considered to improve access to higher education for all deserving students.

President Jacob Zuma – who released the findings of a Report of the Commission into the Feasibility of Fee-Free Higher Education and Training in South Africa earlier this month – has directed that these be implemented in a fiscally sustainable manner.

“Given the nation’s financial constraints, this necessarily implies a phased approach focusing on the neediest students. Work is underway between the Presidency, National Treasury and the Department of Higher Education and Training to finalise the new model for funding higher education, which will be announced in the near future.”

The 2018 Budget which will be tabled in February will outline decisive and specific policy measures to strengthen the fiscal framework, as an important contributor to improved confidence of all stakeholders, and a return to inclusive growth.

Returning to growth

While progress has been achieved on most of the 14 Confidence Boosting Measures announced by Minister Gigaba in July, decisively strengthening governance at Eskom – with the appointment of a highly trusted and capable board as a first step – is an urgent priority.

In addition, government will address the root causes of the revenue gap of R50 billion arising from the underperforming economy and a possible erosion of revenue collection capability.

In this regard, a judicial commission of enquiry is being undertaken, it said.

National Treasury remains the centre where budgeting occurs as provided for in the Constitution.

“It is also important to clarify that the Mandate Paper developed by the Department of Performance, Monitoring and Evaluation serves to set priorities for the whole of government, ensuring alignment with the National Development Plan. The PFC streamlines decision-making, and provides the necessary authority to co-ordinate and ensure adherence to the fiscal framework by the entirety of government, driven at the Cabinet level.

“This in no way undermines the role of National Treasury in the budget-setting process.

“Going forward, government will continue to engage with all stakeholders, and the general public on all key developments as progress continues towards the finalisation of the 2018 Budget,” said Treasury.

In September, Minister in the Presidency responsible for Planning, Monitoring and Evaluation, Jeff Radebe, said the Mandate Paper, developed to facilitate budget reprioritisation, will be used in this year’s budgeting process to align spending to government priorities.

The Mandate Paper was developed after the National Planning Commission recommended the intervention with the aim of guiding budget allocations and determining priority spending areas.