CAPE TOWN – Recent political and economic uncertainty, including the perception of corruption, have clouded investor sentiment in South Africa, said auditing firm PricewaterhouseCoopers (PwC).
Commenting on the expected ratings agency's announcement, PwC said that all eyes would be on newly appointed Finance Minister Tito Mboweni’s first Medium-term Budget Policy Statement (MTBPS).
PwC said in a statement: "Just two weeks into his tenure, Minister Mboweni will face the task of affirming government’s commitment to fiscal consolidation and strategic investment in the face of low economic growth"
"Keeping close watch of potential changes to the creditworthiness of South Africa’s sovereign, ratings agencies credit-relevant details in the MTBPS."
According to the firm, In September, Moody’s offered South Africa some good news, when it noted a downgrade of South Africa’s credit rating to below investment grade was unlikely in the near future.
"Moody’s is the last of the three major credit rating agencies that have kept South Africa’s credit rating at investment grade level, currently with a stable outlook. If Moody’s were to downgrade South Africa’s debt to sub-investment level, South Africa would be removed from the Citi World Government Bond Index, prompting asset managers and pension funds to sell domestic bonds. This would sharply increase the cost of debt and pressure the exchange rate. In view of South Africa’s limited fiscal room, hopes are high that the MTBPS will be, on balance, credit positive," said the PwC.
Reform in state-owned enterprises
According to the PwC, the long-term viability of many SOEs increasingly presenting a fiscal risk as the National Treasury has noted on several occasions that the debts of SOEs have grown rapidly.
"Capital markets have pulled back their lending to some SOEs in the absence of reforms and the agencies increasingly highlight the financial state of SOEs as a matter of routine. Ratings agencies will look out for any measures announced in the MTBPS that help to stabilise the precarious finances of SOEs", said the PwC.
Focus on economic growth
The PwC states that ratings agencies will watch closely what measures could be announced to improve the outlook for the South African economy.
"South Africa entered a technical recession in the second quarter of 2018. Depressed economic conditions commonly precipitate pressure on tax revenues. If not met with changes in government expenditure, poor economic performance reduces government’s ability to meet its loan agreements, ultimately affecting its sovereign creditworthiness", said the PwC.
In addition, the firm hopes that more details about the stimulus and recovery package presented by President Cyril Ramaphosa will be revealed at the MTBPS to outline how the fiscal package will target priority sectors.
"The ratings agencies will look closely to determine whether these interventions will lift the outlook for potential growth in the medium term", said the PwC.
The firm states that the National Treasury will likely revise downward its 2018 growth expectations.
"During February, the National Treasury forecast annual GDP growth of 1.5% in 2018. Considering the average economic growth of only 0.6% in the first half of 2018, South Africa would have to achieve economic growth of 2.4% year-on-year on average in the second half of the year to achieve this forecast"
"Trends across the economy, however, suggest the cyclical upswing is slow to materialise, with economic growth of below 1% likely this year. While slow economic growth is viewed as credit negative, measures that raise the growth trajectory sustainably would, however, provide support to South Africa’s credit rating"
If the MTBPS effectively addresses all three priority areas, ratings agencies are likely to respond favourably and SA's credit rating remains a crucial ingredient for keeping the costs of debt under control and freeing up spending for South Africa’s most pressing economic challenges.
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