S&P Sees Bold S. African Budget Targets Amid Growth Concerns

South Africa Finance Minister on Credit Outlook
  • S&P's Reuss says negative outlook on credit rating remains
  • Goldman's Coleman says markets want government implementation

Standard & Poor’s said while South African Finance Minister Pravin Gordhan’s budget contains “bold” targets, there are concerns about how the country will boost economic growth.

Gordhan on Wednesday pledged to narrow the fiscal deficit to 2.4 percent of gross domestic product in three years time from the current 3.9 percent. He also raised taxes on capital gains and property sales to help increase revenue, while pledging to curb the civil service by eliminating non-essential jobs.

South Africa is at risk of losing its investment-grade credit-rating status because of slowing growth and rising debt. Standard & Poor’s has a negative outlook on the nation’s sovereign rating of BBB-, which is one level above junk.

“The negative outlook is there,” Konrad Reuss, managing director for Africa at the ratings company, said at the Bloomberg Africa Business and Economic Summit in Cape Town. “It’s not going to go away. That is mainly because we are worried about growth in the economy and how the National Treasury and others in government can manage in a prolonged period of low growth.”

The Treasury lowered its economic growth forecast for this year by almost half to 0.9 percent as weak global demand and the worst drought in more than a century curb output. The growth projection was reduced from 1.7 percent estimated in October. The economy is set to expand 1.7 percent next year from a previous forecast of 2.6 percent.

“You have to bear in mind this is a middle-income economy,” Reuss said. “The population is growing at around 1.5%. When you’re looking at growth from a per capita growth perspective, it looks very dismal.”

Gordhan’s budget disappointed investors looking for bolder action to stave off a credit-rating downgrade. The rand plunged against the dollar, euro and pound, sliding as much as 3.2 percent versus the U.S. currency, the most since Dec. 10. The yield on the benchmark 10-year bond climbed as much as 21 basis points after the minister started speaking.

“The market reaction is going to be brutal in terms of assessing the level to which action takes place,” Colin Coleman, partner and head of Goldman Sachs Group Inc. in South Africa. “We don’t need to see too great a surgery, we just need to see that the knife is cutting into the body of the economy in a proper and incisive way.”

(Updates with comment by Reuss in sixth paragraph.)

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