South Africa faces credit downgrade as debts soar
October 26, 2017 | 9:31 am| | | Start Conversation
South Africa’s forecast of higher debt and wider fiscal deficits over the next three years raises the risk of further credit-ratings downgrades as a battle for control of the ruling party limits policy choices.
Finance Minister Malusi Gigaba painted a bleak picture of the state of the country’s finances in his first mid-term budget on Wednesday, with growth and revenue set to fall well short of projections made in February. He warned there was little scope to raise taxes or cut spending. The rand fell to the weakest level this year and bond yields surged.
“It is not in the public interest, nor is it in the interests of government, to sugarcoat the state of our economy and the challenges we are facing,” Gigaba told lawmakers in Cape Town. “Improving our economic growth outlook over the period ahead remains our biggest challenge.”
The deteriorating debt trajectory threatens to trigger a downgrade of the country’s local-currency debt rating to junk by S&P Global Ratings and Moody’s Investors Service, which could spur massive capital outflows. S&P and Fitch Ratings Ltd. stripped South Africa of its investment-grade foreign-currency assessment in April, citing concerns about policy uncertainty and lackluster growth, just days after Gigaba replaced Pravin Gordhan as finance minister.
If the ratings companies “don’t do anything after today they are frozen behind the wheel,” George Herman, chief investment officer at Citadel Investment Services in Cape Town, said by phone. “The ratings downgrade is now all but guaranteed, it’s just a matter of them saving face and deciding when to do it.”
Gigaba and his team spoke to ratings companies on the phone Wednesday after the budget speech and will meet with the firms next week, Deputy Finance Minister Sfiso Buthelezi said.
“I pray that doesn’t happen,” he said an interview, referring to the chances of a cut in the local-currency rating. “Obviously we never know what goes through their minds. From our side what we can do is explain our story and hope that because of the things we have done that our story will be credible. We did everything that we could.”
The fiscal forecasts are a “worst-case scenario” and revenue options are being considered, he said.
Zuzana Brixiova, lead sovereign analyst for South Africa at Moody’s Investors Service, was not immediately able to respond to an email requesting comment. Fitch Ratings Ltd.’s spokesman Peter Fitzpatrick didn’t immediately respond to an email and Gardner Rusike, sovereign analyst at S&P, didn’t respond to an email seeking comment.
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