South Africa Faces Downgrade Risk With Protest-Marred Budget

  • Finance minister cuts GDP forecasts, widens fiscal deficits
  • Students demanding lower fees clash with police at Parliament

South Africa took a step closer to another credit-rating downgrade as a slowing economy forced Finance Minister Nhlanhla Nene to boost debt at the same time that mounting spending pressures fueled protests against the government.

Nene, 56, struggled to provide the level of confidence investors were looking for in a mid-term budget on Wednesday that was marred by clashes outside Parliament between police and university students calling for lower fee increases. His speech was disrupted as opposition lawmakers were ejected from the National Assembly for chanting “fees must fall” in support of the protesters.

Nhlanhla Nene
Nhlanhla Nene
Photographer: Simon Dawson/Bloomberg

The tension underscores the tough choices Nene is facing in trying to safeguard South Africa’s credit rating. Weakening tax revenue is putting pressure on the budget deficit, giving him less room to spur an economy close to recession and cut a 25 percent jobless rate.

“The government is now tightly stuck between the slowing economy -- and tax revenue growth -- and spending pressures, emanating from social-spending pressures, a rapidly growing wage bill and surging debt-service costs,” Rian le Roux, chief economist at Old Mutual Investment Group in Cape Town, said by e-mail. “This squeeze highlights the need for urgent growth-friendly economic reforms.”

Nene cut this year’s growth forecast to 1.5 percent from 2 percent and predicted expansion of 1.7 percent in 2016, down from an earlier estimate of 2.4 percent. With the slowdown reducing tax revenue projections by 35 billion rand ($2.6 billion) over the next three years, the budget deficit will widen from earlier forecasts, reaching 3.3 percent in the fiscal year through March 2017 and 3.2 percent in the following year.

Surging Debt

Interest payments on debt are rising the fastest of any other spending item in the budget, making another downgrade costly. Gross debt has surged from about 26 percent of gross domestic product from before the 2009 recession to reach almost 50 percent this year.

“The expectation that the public debt-to-GDP ratio will stabilize over the coming years looks optimistic,” William Jackson, senior emerging-market economist at Capital Economics Ltd. in London, said in a note to clients. “We think that the debt ratio will grind higher and a sovereign-debt downgrade remains a distinct possibility.”

Yields on the government bond due December 2026 rose for a second day on Thursday, increasing 4 basis points to 8.44 percent as of 10:40 a.m. in Johannesburg. The rand fell 0.4 percent to 13.5785 against the dollar, taking its decline to 15 percent this year.

Community Protests

Twenty-one years after the end of white minority rule, the ruling African National Congress is still struggling to meet the expectations of an electorate for a better quality of life. Official data shows 22 percent of the population of 55 million don’t get enough to eat and white households on average earn six times more than their black counterparts.

The student protests follow on a series of demonstrations by poor township
residents demanding housing, education and other services. The police
documented 2,289 violent community protests in the year through March 2014, up from 1,907 the year before.

“The issues that we’ve highlighted in our last report continue to be of concern; with low growth, which has been the background for the changes in the fiscal numbers going ahead, at the heart of the problem,” Ravi Bhatia, director of sovereign ratings at Standard & Poor’s, said by phone from London. The protests feed off an “economy not generating enough growth to create jobs and reduce unemployment, which then causes heightened issues around competition and the inability to afford the fees,” he said.

‘Robust’ Plan

Fitch Ratings Ltd. has a negative outlook on South Africa’s BBB assessment, indicating that it may cut the nation’s debt from two levels above junk when it publishes its next review in December. S&P and Moody’s Investors Service have stable outlooks on their assessments. Fitch’s rating is in line with Moody’s and one level above S&P.

JF Ruhashyankiko, an economist at Goldman Sachs in London, said the mid-term budget numbers raise the prospect of a rating cut by Fitch this year and S&P lowering its outlook on South African debt.

The mid-term budget “highlights how challenging it will be to stabilize public finances in the face of weak growth,” Fitch said in a statement. While Nene’s targets are “more realistic,” the combination of larger deficits and weaker growth will keep public debt rising, it said. The government also hasn’t cut back on spending, which is forecast to increase 7.2 percent a year over the medium term, exceeding inflation, Fitch said.

Nene said he didn’t see any reason for a downgrade, comments that were echoed by central bank Governor Lesetja Kganyago, who said on Thursday the “macroeconomic framework is robust enough to enable us to defend our rating.”

“It would be unfair for anybody to think that government is not taking the matter seriously of addressing the challenges brought about by the economic environment at home and globally,” Nene said in an interview after the budget speech.

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