Poor Growth to Curb South Africa Fiscal Boost Efforts, S&P Says

(Bloomberg) -- “Very poor growth” will make it difficult for South Africa to improve its fiscal position, S&P Global Ratings said after cutting the nation’s rand debt to junk.

“If the growth story turns around then the whole story could turn around,” Ravi Bhatia, a credit analyst at S&P, said in an interview on Bloomberg TV Monday. “It’s really a case of them pushing through reforms which would actually turn around the growth story and then we can see the dynamics of the debt story change.”

The downgrade reflected a further deterioration of the economic outlook and the nation’s public finances, S&P said Nov. 24 as it also lowered the assessment on the country’s foreign-current debt, already considered speculative, by one more step to the second-highest junk rating.

Conflict in the ruling party in the run-up to its leadership election next month has hamstrung efforts to bolster Africa’s most-industrialized economy, which had its second recession in less than a decade earlier this year. The central bank forecasts 0.7 percent expansion this year. Business confidence is near the lowest level in more than three decades amid allegations of corruption against state company managers and politicians including President Jacob Zuma.

Next month’s elective conference will be of interest to ratings companies and they will also be watching the February budget for more information on the nation’s debt trajectory and growth prospects. The government is considering measures that will combine tax increases and spending cuts to save 40 billion rand in the 2019 fiscal year.

“We could wait for conference and budget but our view was it would be very hard of them to turn it around and we’re in a new fiscal trajectory now,” Bhatia said.

South Africa projects a revenue shortfall of 50.8 billion rand in the 2018 fiscal year that ends in March, and sees public debt exceeding 60 percent of gross domestic product by 2022, Finance Minister Malusi Gigaba said in his Oct. 25 medium-term budget.

“The Treasury is still very good, broadly, at controlling the expenditure line,” Bhatia said. “The problems are actually on the revenue side where, because of the poor growth, revenue has not been up to expectations.”

Zuma’s Presidential Fiscal Committee will finalize proposals to cut 25 billion rand in spending and enhance revenue by 15 billion rand through measure that will include taxes, his office said in a statement Monday.

S&P’s reduction means South Africa will suffer as much as $2 billion of outflows as a result of falling out of the Barclays Global Bond Index, John Cairns, a strategist at Rand Merchant Bank in Johannesburg, wrote in a note to clients.

Moody’s kept South Africa’s ratings on its lowest investment grade on Nov. 24 but placed them on review for possible downgrade within days.

Should Moody’s cut, this raises the risk that South Africa’s rand debt, which comprises about 90 percent of its outstanding liabilities -- may fall out of gauges including Citigroup Inc.’s World Government Bond Index. This could spark outflows of as much as 100 billion rand ($7.1 billion), Citigroup said last week.

Fitch Ratings affirmed the country’s debt scores at its highest non-investment grade with a stable outlook on Nov. 23.

--With assistance from Matthew Miller

To contact the reporters on this story: Arabile Gumede in Johannesburg at agumede@bloomberg.net, Guy Johnson in London at gjohnson87@bloomberg.net.

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Ana Monteiro

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