Has the Budget speech averted a downgrade?

Yesterday’s budget speech has rallied up quite the conflicting reaction, as many dub the speech ‘nothing new’ while others are optimistic about the big focus on growth enhancing reforms. The question however is, was it enough to successfully avert a ratings downgrade?

“While it is a step in the right direction and has probably bought South Africa some time, the odds of a downgrade by at least one ratings agency in December 2016 remain high,” remarked FNB chief economist, Sizwe Nxedlana.

As predicted Treasury took to revising their growth expectation down from last year’s Medium Term Budget Policy Speech (MTBPS). This saw the growth rate for 2016 falling from the MTBPS figure of 1,7 % to what Treasury deems a more realistic 0,9% currently.

“Treasury remains relatively optimistic about the economic outlook compared to our expectations. Consumer inflation is expected to be above six percent over the next two years,” Nxedlana noted.

He went on to state: “While the proposed fiscal consolidation targets are ambitious, today’s effort was not sufficient to support a conclusion that a downgrade in December is unlikely.”
The rand reportedly started weakening 20 minutes into Gordhan's speech yesterday, leaving commentators speculating that investors were unhappy with the budget.

“However, it emerged that Moody's downgrade of Brazil to junk status was the main reason for the rand rout. The unit lost more than 2.5% of its value against the dollar to R15.62, from R15.23 before Gordhan delivered his Budget Speech,” reported Fin24.

Nxedlana went on to explain that their reasoning behind their notion was that ‘we are probably too late to implement and display evidence of growth enhancing structural reforms in time to save an investment grade rating from all three major agencies.’

A step in the right direction?

There was, however, evidence in the speech that South Africa has taken a step for the better, which FNB noted would at least prevent them from further hits.

Despite the more aggressive and stringent approach to fiscal consolidation, Nxedlana highlighted a few factors that could delay the plan for stabilisation of governmental debt below the 50% mark:

- “Growth is likely to be weaker than the Treasury’s forecasts leading to lower than expected tax revenue collection,” Nxedlana stated.

- State-owned entities (SOEs) may need to utilise the option of state funding/ guarantees in the immediate term to allow them to execute the necessary reforms, while remaining afloat.

- “Third, while the Treasury has either met or outperformed previous expenditure ceilings, the proposed further reduction in the ceiling targets the wage bill which government has previously failed to contain within set boundaries,” explained Nxedlana.

In addition to concerns about the absence of detail around the revenue measures set to accomplish the smaller deficits predicted for the coming three years, Moody’s has also termed the revised growth forecasts as ‘slightly optimistic.’ This, as it comes in slightly above their original prediction of ‘0,5 for 2016 and 1,5 for 2017’, reported Fin24.

“Finally, while the tone of the Budget Speech and Review suggested a commitment to pursuing supply side reforms aimed at improving business confidence and aiding growth, we have heard this before,” remarked Nxedlana.