JOHANNESBURG – Financial services company Standard & Poor’s looks set to spare South Africa from junk.
In his mid-term budget last week, South African Finance Minister Nhlanhla Nene said he would raise an additional 27 billion rand in tax and lower spending ceilings by 25 billion rand over the next two years, measures that were necessary to avoid falling into a debt trap.
The plan was accompanied by reduced growth forecasts for the economy, now seen expanding 1.4 percent this year, the slowest since the 2009 recession.
The yield difference between South Africa’s dollar bonds and US Treasuries narrowed 7 basis points to 225 and the rand rallied following Mr Nene’s October 22 speech.
S&P, which cut the nation to its lowest investment grade of BBB- in June, said it saw “positive surprises” in the budget.
“The rating is where is should be,” Konrad Reuss, managing director for sub-Saharan Africa at S&P, said by phone from Johannesburg on October 24.
The cut to the growth forecasts “were factored into the rating,” he said.
“We have a stable outlook on the rating.”
Avoiding a cut to junk would help ward off higher borrowing costs for the government and companies and forestall capital flight by funds forbidden from investing in non-investment-grade entities.
South Africa is rated three steps stronger than junk by Moody’s Investors Service, and two levels higher by Fitch Ratings.
Both have a negative outlook on the debt.
The June rating cut was the second downgrade by S&P in less than two years.
Mr Nene has definitely done enough to avoid a junk rating, according to Peter Kent, who helps manage the equivalent of about $14 billion (R153 billion) at Investec Asset Management.
“From a fiscal perspective it was an exceptionally positive budget,” Kent said by phone from Cape Town on October 23.
“It’s not a nice message to be sending, but it was courageous and the right thing to do.”
S&P and Fitch will review South Africa’s credit rating in December.
“We’ve done everything humanly possible for our economy to be restored to a sustainable path,” Mr Nene said in an October 22 interview in Cape Town.
“I can’t speak on behalf of the ratings agencies.”
The yield on the benchmark rand-denominated bond due in December 2026 fell 12 basis points since the day before the mid- term budget, and traded at 7.90 percent on October 24.
That’s the lowest level in a year.
The rand gained 1.1 percent over the same period, the best performance among 16 major currencies tracked by Bloomberg.
It weakened 0.1 percent to 10.9455 per dollar by 8:35 am today in Johannesburg.
The budget “highlights the fresh difficulties the Treasury faces to rein in the deficit and stabilise the debt in a low- growth environment,” Moody’s Senior Vice President Kristin Lindow said by e-mail on October 23.
“The government’s ongoing commitment to fiscal consolidation and renewed emphasis on structural reform and competitiveness indicate its determination to confront these circumstances.”
Mr Nene plans to reduce the budget deficit to 2.5 percent of gross domestic product in the year through March 2018 from 4.1 percent this fiscal year.
“Even though growth has collapsed, the government is forced to undertake fairly drastic austerity measures,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said by phone from London.
“Unfortunately the lack of growth and competitiveness are now the underlying concerns. There’s a risk that austerity backfires.”
Fitch’s current rating for South Africa “recognises the growth and fiscal consolidation challenges the country faces,” Ed Parker, the company’s head of sovereign ratings for Europe, the Middle East and Africa, said in e-mailed comments on October 24.
The rating also acknowledges “the economy’s credit strengths and shock-absorbing capacity through a floating exchange rate, strong banking system and financing flexibility afforded by a high share of local currency debt with long maturity.”
Lungisa Fuzile, the head of the National Treasury, said in Cape Town on October 23 that while the proposals weren’t directly aimed at avoiding downgrades, they should appease the ratings companies.
“The measures that the minister unveiled go a long way toward addressing the concerns of investors,” he said. – Bloomberg News