Johannesburg - Ahead of the medium-term budget policy statement on Wednesday, Citi economist Gina Schoeman has warned of a possible sovereign rating downgrade from Moody’s Investors Service.
The agency has South Africa on Baa1, one notch above the BBB+ rating awarded by Standard & Poor’s and Fitch. All three agencies downgraded the country a year ago on fears that the government would not be able to keep control of spending at a time when revenue was under pressure.
It appears unlikely that the government will achieve the projected budget deficit target of 4.6 percent of gross domestic product (GDP) set by Finance Minister Pravin Gordhan in February. The deficit is the gap between state revenue and spending. But analysts are focusing on broader policy issues.
A routine report on South Africa, released by Moody’s last week, reflected positives and negatives and gave no hint of a further rating action. However, it referred to the controversial National Development Plan (NDP), incubated by Planning Minister Trevor Manuel’s National Planning Commission (NPC). Moody’s noted that the ANC had endorsed the plan but “the other members of the ANC-led tripartite alliance – Cosatu and the SACP – are opposed to the liberal economic concepts in the NDP and continue to lobby for non-market-based solutions for the country’s high unemployment and inequality”.
Moody’s said it had affirmed the negative outlook for the country in July, “reflecting continued tensions over the government’s economic policy orientation within the governing alliance, and heightened uncertainty as to outcome of those tensions in the run-up to next year’s parliamentary election”.
Schoeman said the timing of a cut would depend on a number of factors, including the outcome of budget and policy issues, which could be clarified by Gordhan on Wednesday.
Nomura strategist Peter Montalto said on Friday: “We expect the Treasury to firmly though subtly plant its flag in the NDP debate on the side of the NPC and against Cosatu. The budget speech may contain proposals to align policy to NDP implementation and how individual budget lines over the medium term fit with NDP.”
Commenting on another point of discord in the tripartite alliance, he said: “We expect further backing for the youth wage subsidy bill, which has entered parliament as new legislation although it’s been in the budget for nearly three years .”
He advised the Treasury not to “paper over the cracks” but to be “blunt” about problems and “credibly telegraph policies to be put in place to address them”.
While labour-related issues and policy uncertainty dominate the domestic scene, the global outlook has improved.
The week starts on a reasonably optimistic note after the end to the US government shutdown last week and signs of stronger growth in China.
Ishaq Siddiqi, a strategist at ETX Capital, said growth in China’s GDP was stronger than expected, 7.8 percent in the third quarter from the same period a year earlier – better than the 7.5 percent expected by the market. Growth was 7.7 percent in the first quarter and 7.5 percent in the second. China is South Africa’s biggest export market.
Standard Bank analyst Bruce Donald said commodity and emerging market currencies were appreciating on Friday. But he noted: “The rand ranked second from the bottom in the commodity currency category, beating only the Canadian dollar, and third from the bottom in the emerging market currency category, beating only Turkey’s lira and China’s yuan.” - Business Report