Weak growth to trim SA revenue - Moody’s

File photo: Nadine Hutton.

File photo: Nadine Hutton.

Published Feb 5, 2016

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Johannesburg - South Africa’s government debt could climb to more than 50 percent of gross domestic product (GDP) for the first time in more than a decade as weak economic growth curbed tax revenue, Moody’s Investors Service said yesterday.

Moody’s said lower growth would also reduce the fiscal space needed to tackle South Africa’s most severe drought in decades.

Read: SA can't raise taxes - Moody's

The agency’s senior vice-president, Kristin Lindow, said in a credit outlook report that this would make it difficult for the government to maintain a sound fiscal position.

Lindow said even though the National Treasury had budgeted conservatively for the current fiscal and next year – including an accurate assumption of very weak corporate income tax revenues – the near-zero growth rate was a significant downward shift in the already narrow tax base that even a buoyant tax base could not overcome.

She said a further decline in growth would probably dampen revenues further, which would make it difficult to maintain a sound fiscal position when the government faced difficulties in adhering to its spending ceiling.

“In turn, a widening fiscal deficit combined with reduced growth will delay stabilising and reversing the rising public debt/GDP trajectory, bringing the ratio to more than 50 percent for the first time in more than a decade,” Lindow said.

Moody’s warning will add to Finance Minister Pravin Gordhan’s woes as he prepares for his most difficult Budget.

Currently the country’s public debt is 45 percent of GDP.

The Reserve Bank cut its growth forecast to 0.9 percent from 1.5 percent in January.

Moody’s noted this was the Reserve Bank’s third downward revision to its 2016 real GDP growth forecast in as many meetings.

The forecast by the International Monetary Fund is 0.7 percent and the World Bank’s is 0.8 percent, while Moody’s estimate growth to be between 0.5 percent and 1.5 percent.

Notch above junk

Moody’s rates South Africa two notches from subinvestment grade with a negative outlook.

Fellow ratings firms Fitch and Standard & Poor’s (S&P) both have the country only one notch above junk status, and have cited weak growth, policy uncertainty and large budget and current account deficits as major risks for a downgrade.

Lefika Securities’ economist Colen Garrow said the economy appeared more and more poised to enter a recession that could be more destabilising and entrenching than the last one in 2009.

Garrow said in addition that this would compromise a wide range of key financial stability ratios, particularly those the credit rating agencies were most concerned about, like public debt.

“This ratio continues to edge stealthily to the fiscal cliff a larger numbers of analysts have cautioned against, and which has increased the odds of further rating downgrades by major rating agencies, such as S&P and Moody’s, each of which have recently commented on the fallout of lower-than-expected GDP growth for the year,” Garrow said.

Meanwhile, South Africa’s business confidence has recovered in January from its lowest level in 23 years after an increase in credit to the private sector, but could again come under pressure from a slowing economy, a survey by the SA Chamber of Commerce and Industry (Sacci) said yesterday.

The business confidence index had risen marginally to 80 points from 79.6 points in December.

“The financial climate was slightly more favourable towards business than in December as the volume of credit extension to the private sector picked up,” the business organisation said.

Sacci, however, said decisive steps should be taken to counter the present difficulties facing the economy.

It said the Reserve Bank, when raising the repo rate by 50 basis points in assessing inflationary expectations, had adhered to a policy approach that suggested the resolve to tackle the economic ills in a resolute manner.

“A similar approach will be expected from the newly appointed minister of finance in allaying fears on ballooning public debt and containing public expenditure.”

BUSINESS REPORT

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