S. Africa Must Keep Fiscal Oath to Hold Rating, Gordhan Says

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  • Policy consistency, institutional strength key for ratings
  • Work with unions, business ‘must continue,’ minister says

South Africa's Gordhan Says Treasury Works for the People

South Africa must stick to its budgetary promises and be consistent with policies to maintain its investment-grade credit rating, Finance Minister Pravin Gordhan said.

“We have kept to our fiscal commitment -- we said we would continue with fiscal consolidation in a careful and balanced way, we said that we would taper off debt, we have kept to that to a large extent,” Gordhan said in an interview in Cape Town Wednesday. There is “no evidence” that political developments within the ruling African National Congress will change policy, he said. 

Pravin Gordhan interview on Feb. 22.

Photographer: Halden Krog/Bloomberg

Slow economic growth and political infighting are key factors rating companies have highlighted as risks to their assessments. Gordhan has had to balance efforts to boost the economy against the need to contain rising debt to fund the budget of Africa’s most-industrialized economy.

He pledged to narrow the budget deficit to 2.6 percent of gross domestic product in the year through March 2020, from an estimated 3.4 percent in the current fiscal year. The economy probably expanded at the slowest pace in seven years in 2016.

Speculation that Gordhan is about to be fired has swirled for months, as he clashed with President Jacob Zuma over the management of state companies and the national tax agency. While the minister has led efforts to keep spending in check and fend off a junk credit rating, Zuma wants to embark on “radical economic transformation” to tackle racial inequality and widespread poverty.

Policy Matters

“There were finance ministers before me and there will be finance ministers after me,” Gordhan said. “I don’t think the individual matters, it’s the policy that matters. And if we can sustain a sensible fiscal policy, like we have done for the past 20-odd years, I think we will keep everybody happy. People come and go, but the key is, and even the ratings agencies will tell you that, that it’s about policy consistency and institutional strength.”

The rand strengthened 0.8 percent at 12.8663 per dollar by 3:34 p.m. in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 fell five basis points to 8.70 percent.

The Treasury expects to collect 1.14 trillion rand ($87.7 billion) in taxes in the 12 months through March 2017, 30.4 billion rand less than it projected a year ago and the biggest shortfall in seven years. It anticipates raising an additional 16.5 billion rand from the new top tax bracket and also by limiting relief for inflation, an extra 6.8 billion rand from a higher dividend tax and 5.1 billion rand from increased fuel taxes and duties on tobacco and alcohol.

New measures to raise tax revenue “should assist ongoing fiscal consolidation efforts,” Ravi Bhatia, director for sovereign ratings at S&P Global Ratings, said in an e-mailed response to questions.

Ratings Assessment

While S&P and Fitch Ratings Ltd. kept their assessments of the nation’s foreign-currency debt at one level above junk late last year, and Moody’s Investors Service rates the debt one step higher, there is still a chance that South Africa will be downgraded this year, Russell Lamberti, a chief strategist at ETM Investment Services in Cape Town, said earlier this month.

“Amid challenging conditions, the 2017-18 budget sets out fiscal-consolidation targets consistent with commitments in the 2016 mid-year policy statement, including a gradual stabilizing of the debt-to-GDP ratio,” Moody’s Vice President Zuzana Brixiova said by e-mail. “While government guarantees relative to GDP are also projected to stabilize, their actual drawdowns are rising and represent increasing risks to the government’s fiscal position.”

The main challenge to fiscal targets in South Africa comes from factional tensions in the ruling ANC and political risks to governance and policy-making will remain high at least until the party electoral conference in December, Fitch said in an e-mailed statement Thursday. This is reflected in the negative outlook on South Africa’s BBB- rating, Fitch said.

There is always a risk of a cut when a rating is one notch above sub-investment grade, Gordhan said.

“That is why the good work that we have done last year in working with trade unions, business and civil society needs to continue into this year,” he said.