#Budget2016 / Johannesburg - South Africa delivered a credible budget to avoid a credit-rating downgrade to junk and financial markets probably overreacted by expecting more austere measures, Finance Minister Pravin Gordhan said.
“We need to demonstrate it to ourselves as South Africans that we can put a package together, both in terms of our plans and financing those plans, that are credible, that are sustainable and that are viable,” Gordhan said in an interview in Cape Town on Wednesday. “I think we’ve managed to do that.”
Read: No surprises in Gordhan's Budget
Gordhan was under pressure to deliver a budget that would preserve the nation’s investment-grade credit rating in the face of slowing economic growth and rising debt. He pledged to bring the fiscal deficit down to 2.4 percent of gross domestic product over the next three years by curbing the civil service and raising taxes. That didn’t go far enough for some investors who were expecting more significant tax increases and state asset sales to boost revenue.
The minister “over-promised and under-delivered”, Jeffrey Schultz, an economist at BNP Paribas Securities, said by email. “More explicit revenue-generating measures were needed in today’s budget in order to bolster policy credibility. We don’t think that enough has been done to avoid a ratings downgrade.”
Credit ratings
Standard & Poor’s has a negative outlook on its rating of BBB-, the lowest investment grade, while Fitch Ratings has a stable outlook on its equivalent assessment. The two companies are due to publish reviews of their ratings in June and December. Moody’s rates the nation’s debt two levels above junk, with a negative outlook.
The rand slid the most against the dollar and euro after the Seychelles’s rupee, plunging as much as 3 percent versus the US currency, while the yield on the benchmark 10-year rand bond jumped 17 basis points to 9.33 percent by 7pm in Johannesburg.
Read: Rand plunges as Budget disappoints
Market reaction to the budget may improve after investors take more time to consider the numbers, Gordhan said.
“Depending on the kind of mindset you approach South Africa’s issues with, you can often set unrealistic expectations,” he said. “The budget is not something that you can instantly react to, it requires some study to understand what are the different elements in the proposition that we are putting forward. If there’s more relaxed observations about the budget, there will be hopefully a better response from the markets.”
Gordhan was reappointed to his post in December after President Jacob Zuma was forced to backtrack on a decision to fire Nhlanhla Nene as finance minister and replace him with a little-known lawmaker. Gordhan had been in the job from 2009 until 2014.
“He did not drive the economy into recession as that is something he could easily have done with this budget” by raising taxes aggressively, Iraj Abedian, chief executive officer of Pan-African Investment and Research Services, said in an interview in Cape Town. “He has managed to hold back the ratings agencies and analysts for the time being, but the real acid test is government implementation of the plans.”
Gordhan forecast the budget shortfall will narrow from an estimated 3.9 percent of GDP this year, based on the view that economic growth will more than double from a projected 0.9 percent in 2016 to 2.4 percent in 2018.
Read: Budget deficit expected to narrow
The budget aims to deliver faster fiscal consolidation, while the planned increase in tax revenue is “well-targeted given the weak economic backdrop”, Kristin Lindow, senior vice-president and sovereign analyst for Moody’s, said in an email. S&P said while the budget contains bold targets, there are concerns about how the country will boost economic growth.
“The risks are if we grow slower, if we’re not prepared to make further adjustments, both on the expenditure side and on the revenue side,” Gordhan said. Other risks he cited are if “developed countries begin to get into more trouble than they are in” and if the current drought continues, he said.
* With assistance from Paul Vecchiatto and Franz Wild
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