Fitch warns S.A may struggle to implement Budget proposals; Moody's says it's short on detail


CAPE TOWN (Reuters) – South Africa’s budget aims to quickly consolidate spending by cutting a large public sector wage bill, but has not identified specific revenue measures to achieve smaller deficits, Moody’s said on Wednesday.

[Read S.A Finance Minister Pravin Gordhan’s 2016 Budget Speech here: 

“Moreover, Treasury’s revised growth forecasts of 0.9 percent and 1.7 percent are still slightly more optimistic than Moody’s own predictions of 0.5 percent for 2016 and 1.5 percent,” Moody’s senior vice president Kristin Lindow said in a statement.

Meanwhile Fitch warned that the country may face a challenge when it comes to implementing its Budget proposals, see full statement below:

Fitch: S Africa Budget – Consolidation With Implementation Risk

Fitch Ratings-London-25 February 2016: The South African budget presented by Finance Minister Pravin Gordhan on Wednesday envisages fiscal consolidation over the next three years to stabilise the ratio of government debt to GDP, despite a substantial downward revision in GDP growth projections.

However, unspecified tax measures in later years, ambitious plans to contain the public wage bill, sustaining political support for fiscal retrenchment, and weak economic performance pose implementation risks, says Fitch Ratings.

Gordhan’s first budget since his reappointment marks a step towards restoring confidence in the public finances following the damage to confidence in economic policy after the turmoil of three finance ministers in five days in December. It reaffirms the government’s commitment to (and further reduces) its main budget non-interest expenditure ceilings, outlines a debt stabilisation trajectory based on more plausible growth assumptions and underlines the priority of fiscal consolidation. But implementation will be challenging.

The budget envisages a cumulative tightening in fiscal policy of around 1% of GDP over the next three years relative to October’s Medium-Term Budget Policy Statement. That leads to a projected reduction in the budget deficit after the impact of weaker growth and higher inflation from 3.9% of GDP in FY2015/16 to 2.4% of GDP in FY2018/19 compared with 3% in the MTBPS. The Treasury estimates the deficit at 3.2% in FY2016/17 (0.1pp lower than in the MTBPS) and 2.8% in FY2017/18 (0.4pp lower).

The macroeconomic environment has deteriorated significantly since the MTBPS. Weaker growth will reduce revenues, higher inflation is increasing expenditure commitments, and the ratio of interest costs to GDP is projected to rise by 0.3pp by FY2018/19. The National Treasury has cut GDP growth forecasts to 1.3% for 2015 (from 1.5% in the MTBPS), 0.9% for 2016 (1.7%), 1.7% for 2017 (2.6%) and 2.4% for 2018 (2.8%). The impact of fiscal tightening is one of many downside risks to growth.

The government announced tax increases worth ZAR18.1bn (0.4% of GDP) in FY2016/17 to reduce the fiscal deficit, mainly from excise tax increases and under-indexing tax allowances for inflation (fiscal drag). It plans further increases of ZAR15bn in each of the two following years, but these measures will only be specified later, reducing their credibility.

The government also set out plans to cut consolidated expenditure by 0.1% of GDP by FY2018/19 relative to the MTBPS. The main cuts identified are to employee compensation, worth 0.5% of GDP, primarily via a hiring freeze on administrative and managerial vacancies.

This will be challenging. May 2015’s wage deal provided for pay rises of 1% plus inflation, which has risen markedly since the MTBPS, in 2016 and 2017, following last year’s 7% increase.

The government projects national government debt to rise from 50.5% of GDP in FY2015/16 to 51% of GDP in FY2017/18, before declining slightly in FY2018/19. This is higher than the estimate in the MTBPS of 49% for FY2015/16, rising to 49.4% by FY2018/19. The upward revision for FY2015/16 is partly due to rand depreciation.

Contingent liabilities from state-owned enterprises are a risk to government debt. The size of these liabilities could partly depend on a nuclear power programme, which the budget review document said “will only expand… at a scale and pace that is affordable, after a thorough and transparent tender process.”

The outlook for GDP growth and public finances remain an important part of Fitch’s sovereign rating assessment. We lowered South Africa’s rating to ‘BBB-‘/Stable from ‘BBB’/Negative on 4 December, 2015.