While two of the three major rating agencies already have South Africa’s foreign debt ratings in sub-investment grade, finance minister Malusi Gigaba’s bleak budget speech this week practically makes ‘full’ junk for the country an inevitability.
As the market and analysts digest the key takeaways from the budget speech, the overarching theme that has emerged from the South Africa’s finance department is one of a country running out of money, and little to no plans to counteract the trend.
By his own admission in his budget speech, Gigaba said that there was pressure from all sides to cut government spending – but few options available to do so.
Real GDP growth for 2017 was reduced from the 1.3% tabled in the February National Budget to 0.7%, more in line with current market thinking and the expectations of the International Monetary Fund and the World Bank. Growth forecasts for 2018 and 2019 were also cut back to 1.1% and 1.5% from 2.0% and 2.2% respectively – and Treasury also tabled its first forecast for GDP growth in 2020 at 1.9%.
According to Craig Pheiffer, chief investment strategist at Absa Stockbrokers and Portfolio Management, these low growth rates, less than the country’s population growth rate, are “hopelessly inadequate” to create sufficient jobs to prevent the nation’s unemployment rate from deteriorating further.
A further major worry was the budget deficit, which extended from the forecast 3.1% of GDP at the time of the February Budget, to 4.3% in the MTBPS. The deficits for 2018/19 and 2019/20 were also widened to 3.9% in each year.
The fact that the forecasts have actually increased from those tabled in the February Budget, talks more to fiscal slippage, Pheiffer said, adding that rating agencies are also likely to see it that way against the backdrop of low growth, political instability, growing unemployment, high levels of poverty and inequality, and growing levels of debt and debt-servicing costs.
“The local currency investment grade credit rating is decidedly in danger. The agencies may opt to wait to see the outcome of the ANC Elective Conference in December and the pronouncements in the February 2018 National Budget before moving on ratings – but sub-investment grade status seems an inevitability for the sovereign’s local currency rating.”
“A lot was pushed out to the February 2018 National Budget but the key takeaway seems to be that a ratings downgrade is only a matter of time,” Pheiffer said.
Speaking to Bloomberg following the budget speech, George Herman, chief investment officer at Citadel Investment Services said that “if the rating companies don’t do anything after today they are frozen behind the wheel.”
“The rating downgrade (for SA) is now all but guaranteed – it’s just a matter of them saving face and deciding when to do it,” he said.
Currently, Fitch is the only rating firm that has South Africa in ‘full’ junk, with both local and foreign currency debt in sub-investment grade.
S&P Global has South Africa’s foreign currency debt in junk, with local currency debt one notch above junk. Moody’s is the most optimistic about South Africa, with both local and foreign currency debt one notch above junk.
Official ratings reviews are scheduled for late November, but rating decisions can be triggered at any time.