(The following statement was released by the rating agency)
Oct 26 – South Africa’s latest Medium-Term Budget Policy Statement shows evidence of further
weakening in the country’s public finances, with consolidation targets pushed back again by
slower than expected growth, Fitch Ratings says. Failure to deliver projected fiscal
consolidation continues to erode one of the sovereign’s key rating strengths compared with its
peers. This erosion contributed to our decision to revise the Outlook on South Africa to
Negative in January.
The government projected a deficit of 4.6% of GDP for FY2012/13 in February 2012. This has
been revised up to 4.8% for the current fiscal year. The government also appears to be falling
behind on its longer-term fiscal consolidation programme. In October 2010 the finance minister
projected that the deficit would be reduced to 3.2% of GDP by FY2013/14; this was raised to 4%
in February 2012 and is now projected at 4.5%. Although this reflects weaker-than-expected
revenue growth, rather than higher expenditure, the further delay to fiscal consolidation
highlights the challenges to fiscal planning and will put upward pressure on debt levels.
Gross debt is now forecast to peak at 42.7% of GDP in FY2015/16 – slightly above ‘BBB’ rated
peers. This is up from 27% of GDP in 2008, when South Africa’s debt ratio was among the lowest
in the ‘BBB’ category. Rising debt will also see interest payments as a percentage of revenue
rising further above the ‘BBB’ median – a situation which would be aggravated if bond yields
rose. The inverse correlation between bond yields and foreign bond purchases has been notable in
recent years, suggesting that a substantial fall in investor confidence could lead to a sharp
rise in borrowing costs. Foreigners have purchased a hefty ZAR84bn of domestic bonds since
January 2012, compared with Treasury’s planned issuance of around ZAR150bn for the current
fiscal year. Reduced foreign appetite for domestic debt could put upward pressure on yields,
although in the short term the inclusion of South Africa in a key global bond index provides a
boost.
Further spending increases (as a proportion of GDP), especially non-discretionary, will
limit South Africa’s already diminished fiscal headroom. High current expenditure, which
includes spending on wages, subsidies and interest, makes up just over 90% of total expenditure
and restricts the fiscal room available to counteract any economic shocks. It also limits the
government’s ability to deliver its ambitious infrastructure spending plans without taking on
additional debt.
Growth projections have also been revised lower over the past year, with negative
implications for employment creation and debt dynamics. In late 2011 economists polled by
Reuters projected growth of 3% and 3.7% for 2012 and 2013 respectively; this has now been
revised down to 2.5% and 3.0%, in line with Treasury’s forecasts. As we highlighted in January,
failure to accelerate growth and make it more sustainably labour intensive would hamper job
creation and increase the risk of social strife, with negative implications for the investment
climate and credit fundamentals.
We have also highlighted long-standing structural problems that have contributed to South
Africa’s weakening growth performance compared to peers, especially in education and labour
reform. Last year’s National Development Plan acknowledged that this has resulted in
insufficient growth to create the jobs required to put a dent in an unemployment rate of 25%.
South Africa’s Long-Term Foreign Currency IDR is ‘BBB+’. We expect to complete our annual
rating review early in the new year.
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