Time for economic reforms running short
JOHANNESBURG – Economists have warned that the government might be running out of time to implement urgent reforms to rescue the economy after S&P Global Ratings revised the country's outlook from stable to negative.
S&P’s negative outlook follows that of Moody’s, which lowered the country’s outlook on its investment grade rating to negative last month.
Moody’s effectively gave the country until the February Budget to fix its fiscal metrics in order to avoid a credit rating downgrade, which remains one notch above sub-investment grade.
S&P on Friday cited the weak pace of economic growth, the country’s large and rising fiscal debt burden, and sizeable contingent liabilities, primarily tied to Eskom, as constraints on a positive outlook.
It said growth in South Africa remained well below that of its emerging market peers, and tax collection continued to disappoint.
Investec chief economist Annabel Bishop said the negative outlook increased the probability of a downgrade in the sovereign rating in about 18 months if reforms were not implemented urgently.
“A negative outlook on the sovereign debt rating indicates that the rating will be downgraded within a period, potentially around 18 months, if the outlook does not return to stable,” Bishop said.
“The downward trend in economic growth since 2011, from 3.3 percent year on year to likely 0.5 percent this year, has added to the rationale for the rating downgrades South Africa has experienced from S&P since 2012, and indeed from Moody’s as well, and from Fitch since 2013.”
South Africa has been ranked at sub-investment grade by both S&P and Fitch Ratings since 2017.
S&P said on Friday that the negative outlook indicated that South Africa's debt metrics were rapidly worsening as a result of the country's low gross domestic product (GDP) growth and high fiscal deficits.
“We expect growth for this year to come in at 0.6 percent, down from our expectation of 1 percent in May,” S&P said in a statement. “We could lower the ratings if we were to observe continued fiscal deterioration.”
FNB economists expect growth to come in at a mere 0.3 percent in 2019, constrained by low confidence, limited fiscal capacity, slow implementation of reforms and a lacklustre labour market.
The SA Reserve Bank (Sarb) on Thursday revised the GDP outlook to 0.5 percent compared with 1.5 percent expected in February, due to lower growth than previously expected in the past two quarters.
The government has been pumping billions of rand into poorly performing state-owned enterprises, widening its deficit to 5.9 percent of GDP, with the national debt exceeding R3 trillion.
Finance Minister Tito Mboweni said last month that debt would most likely exceed 70 percent of GDP by 2022/23 if the government did not implement any policy adjustments.
According to S&P, unless the government takes measures to control the fiscal deficit and fast track the implementation of reforms, debt is unlikely to stabilise within the three-year forecast period.
But the ratings agency acknowledged the credibility of the Sarb and the flexible exchange rate regime to be key strengths supporting the country’s ratings.
In a statement, the National Treasury said the government was committed to implementing much-needed economic reforms in order to revive the country’s economic growth.
“Government fully recognises S&P’s assessment of the challenges and opportunities which the country faces in the immediate to long-term and remains committed to placing public finances on a sustainable path,” it said.
“Furthermore, government reiterates that the growth in the public sector wage bill needs to be addressed in order to reduce the debt burden.”