Austere in All But Name as Debt Attacked: South Africa Credit

South African Finance Minister Nhlanhla Nene is delivering an austere budget in all but name.

Even with economic growth this year set to be the slowest since the 2009 recession, Nene is cutting government spending ceilings and said he’s weighing higher taxes. The rand strengthened and bonds rallied, with the 10-year yield falling the most in major emerging markets.

The government is sacrificing growth as debt repayments reach almost 174 billion rand ($15.8 billion) over the next three years and borrowings approach 50 percent of gross domestic product, a threshold officials consider unsustainable. Nene, who assumed the post in May, is struggling to preserve the nation’s credit rating amid a risk of rising borrowing costs worldwide.

“This is the most austere budget we have seen in the past few years,” Michael Grobler, a money manager at Atlantic Asset Management Ltd. in Cape Town, which oversees the equivalent of about $420 million, said today in an e-mailed response to questions. “It will be enough to support the current ratings for the sovereign, and the market is likely to give the minister the benefit of the doubt.”

Yields on government bonds due December 2026 dropped 12 basis points to 7.90 percent, the lowest in a year, by 7:15 p.m. in Johannesburg. The rand gained 0.5 percent to 10.9965 per dollar.

Dampening Effect

Gross government debt is set to climb to 48.2 percent of GDP in the year through March and increase to 49.8 percent in 2017-18, the National Treasury said in the mid-term budget presented to lawmakers in Cape Town today. The government will raise an additional 27 billion rand from taxes over the next two years, while curbing public-sector wage growth and cutting spending on non-essential items including travel, catering and conferences.

That would help narrow the budget deficit over the next three years to a projected 2.5 percent of GDP, from 4.1 percent this fiscal year. The measures will have a “dampening effect” on economic growth in the short term, according to the Treasury.

To call this “austerity” is “an exaggeration,” Nene told reporters before his mid-term budget speech. Still, the government had “reached a turning point,” he said.

“Rising debt levels, if left unchecked, would absorb more and more of our spending,” Nene said. “The end result would be less money to spend on improving the lives of our people.”

Unsustainable Levels

Domestic-bond issuance is set to rise 8.9 percent this fiscal year to 187.4 billion rand. Sales will fall to 165 billion rand each for the next two years before advancing to 176.9 billion rand in fiscal 2017-18. That’s when 88.8 billion rand of debt repayments are due compared with 33.7 billion rand this year.

Debt-service costs are the government’s fastest-rising expenditure item, consuming a projected 10.1 percent of the national budget this fiscal year, up from 9.6 percent last year.

Standard & Poor’s and Fitch Ratings are reviewing South Africa’s credit rating in December. S&P cut the sovereign rating in June to one level above junk, while Fitch lowered its outlook on its BBB rating, the second-lowest investment grade, to negative. Moody’s Investors Service rates the debt three levels above junk at Baa1, with a negative outlook.

“Continued borrowing at the current level is unsustainable,” the Treasury said. “Without an adjustment, it is likely that South Africa’s sovereign debt would be downgraded to sub-investment grade, risking impaired access to credit markets as gross financing requirements escalate.”

Deficit Pledge

The promise to cut spending and a possible increase in taxes are “positive surprises,” Konrad Reuss, managing director for S&P in South Africa, said by phone. The country’s slow economic growth is already factored into the rating, he said.

Carmen Altenkirch, a London-based director at Fitch, didn’t answer her office phone or respond to messages seeking comment.

A bailout for Eskom Holdings SOC Ltd., the state-owned electricity utility struggling to meet demand for power, won’t affect the budget, Nene said. The government will give the company at least 20 billion rand in cash from the sale of shareholdings in listed companies and other state assets, and Eskom will raise more money through bonds, he said.

With its pledge to contain debt and the deficit, South Africa may have won a reprieve from the rating companies, Jeffrey Schultz, a market economist at BNP Paribas Cadiz Securities in Johannesburg, said in an e-mail.

“Nene stuck to his guns in assuring the market that the government remains committed to its fiscal consolidation profile,” he said. “The minister’s comments and the Treasury’s insistence on fiscal prudence will be relatively well received.”

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