Moody’s Says South Africa’s Spending Commitment More Realistic

South Africa’s commitment to its spending ceilings looks more realistic after Finance Minister Pravin Gordhan’s mid-term budget statement, even as rising debt makes finances vulnerable, Moody’s Investors Service said.

The report presented by Gordhan to lawmakers in Cape Town on Oct. 23 “is consistent both with our expectations and the current rating level,” Kristin Lindow, senior vice president of Moody’s in New York, said in an e-mailed statement today. “On the other hand, the continual postponement of fiscal consolidation poses risks.”

Moody’s has a negative outlook on South Africa’s credit rating after downgrading the country’s creditworthiness to Baa1 in September 2012, the first such cut since 1994. Lindow said that negative outlook incorporates “vulnerabilities,” including lost mining output, and risks to the currency and capital inflows that may arise when the U.S. Federal Reserve begins reducing asset purchases.

South Africa’s debt metrics don’t warrant a negative outlook, Gordhan said in an interview with Talk Radio 702 after estimating the budget shortfall would reach 4.2 percent of gross domestic product in the year through March, unchanged from last year. The finance minister cut his economic growth estimate to 2.1 percent this year, from a February projection of 2.7 percent.

“Explicit references to growth-enhancing measures” were absent from the mid-term budget statement, Lindow said.

Negative Outlook

The budget showed Africa’s biggest economy would have to borrow more in coming years than was forecast in February as the shortfall on the budget will take longer to narrow due to slow economic growth.

While Moody’s affirmed its negative outlook on South Africa in July 2013, the company rates the country’s creditworthiness one level higher than Standard & Poor’s and Fitch Ratings.

President Jacob Zuma’s decision to sign into law a bill permitting the enforcement of electronic tolling on roads around Johannesburg despite opposition from labor unions may encourage infrastructure investment by businesses and reduce the government’s cost burden, Lindow said.

“The government has thus far shown resistance to socio-political pressures in advance of next year’s national elections, particularly with respect to the e-tolling and youth wage subsidy decisions, suggesting that near-term political risks remain relatively low,” she said.

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