South Africa’s investment grade status might stay intact for now after Finance Minister Pravin Gordhan vowed to steer the economy onto a tighter fiscal path, analysts said, but rating agencies will not hesitate to punish any hint of a slippage.
The rand was down 0.61 per cent on Friday and government bonds were also on shaky ground after a heavy sell-off following Gordhan’s budget on Wednesday, in which he cut this year’s economic growth forecast to the lowest since a 2009 recession.
But Gordhan’s pledge to narrow the budget deficit to 2.4 per cent of GDP by 2018/19 might placate agencies that had warned of downgrades after President Jacob Zuma cast doubt on Pretoria’s fiscal policy by abruptly firing former finance minister Nhlanhla Nene in December.
“At first glance, it may buy South Africa time, maybe twelve to eighteen months from ratings bureaus to give South Africa the benefit of the doubt,” Lefika Securities economist Colen Garrow said, but warned that “the lack of growth continues to nudge the country’s credit rating down the ladder.”
Gordhan will certainly take heart from Standard & Poor’s, which said its BBB- rating on Africa’s most industrialised economy was not immediately affected by the budget, which was broadly consistent with its own base-case assumptions of planned fiscal consolidation.
“Nevertheless, we consider South Africa’s fiscal consolidation remains vulnerable to lower-than-expected GDP growth and shortfalls in revenues,” S&P said.
Analysts said Gordhan’s speech was somewhat short on ideas to jumpstart the stalling economy, with growth now seen at 0.9 per cent in 2016, down from the 1.7 pe cent predicted in October. The economy is estimated to have grown by 1.3 per cent in 2015.
While partly blaming a slowdown in China and a crippling drought for the weak forecast, Gordhan also acknowledged structural weaknesses on the domestic front that have been on the ratings agencies’ radar for some time.