Moody’s joins chorus warning SA of risks
MOODY’S Investor Services this week added its voice to that of Fitch, warning about the nearterm risks of policy distraction and spending pressures rising, but said the election results had the potential to stimulate medium-term reforms.
This as the Treasury on Monday sought to reassure ratings agencies that the government would stick to the fiscal targets and objectives set out in the Budget even as the ANC’s support fell in last week’s election.
Support for the ANC dropped to below 60 percent for the first time in an election, with unemployment at 26.6 percent and as South Africa teeters on the brink of its first recession. Fitch on Friday warned the government against populist policies and costly spending measures that could require it to breach expenditure ceilings.
Pro-growth reforms
“South Africa’s changing political landscape will likely result in accelerated pro-growth reforms and improved service delivery over the medium term,” said Zuzana Brixiova, a vicepresident senior analyst at Moody’s.
“These developments could drive improvements in key credit metrics, but will take time to materialise. Meanwhile, near-term spending pressures are likely to rise.”
In a report analysing the local elections, Moody’s noted that the results reflected the rising influence of the opposition on the policy agenda.
Moody’s said urbanisation, the growth of the black middle class and generational change among voters, which underpinned the deepening of the pluralistic party competition, were likely to accelerate over the medium term and drive structural reforms and credit quality improvements.
“This is underpinned by the ongoing societal trends and change among voters where the larger segments are from the black middle class, bornfree, and urban (groups), demanding faster socioeconomic changes.”
The long-term trends created the opportunity for reviving the “Africa rising” narrative that could help South Africa escape the low growth trap of the past several years.
Fitch and S&P Global Ratings affirmed South Africa’s longterm foreign currency rating at BBB, a level above junk, in June and said the government should take decisive measures to bolster growth, quell policy uncertainty and end political turmoil to avoid a future downgrade.
The economy will not expand this year, according to the central bank.
2.4% Fiscal deficit that Gordhan is aiming for by 2019
Moody’s kept South Africa at two levels above noninvestment grade in May after putting its rating on review for a downgrade.
The Treasury said the government remained committed to implementing fiscal consolidation and returning public finances to a sustainable path, while protecting core social and economic programmes.
“Government’s track record of achieving fiscal targets lends weight to future fiscal plans, in particular that of maintaining the expenditure ceiling over the medium term.”
Finance Minister Pravin Gordhan pledged in his Budget in February to narrow the fiscal deficit to 2.4 percent of gross domestic product by 2019, from 3.9 percent last year.
But Peter Attard Montalto, an emerging markets economist at Nomura International, said despite the election results, he was confident there would be no immediate and new impetus to boost growth and avoid ratings downgrades.