‘Don’t punish us. We’re fine’

2012-02-25 09:44

Finance Minister Pravin Gordhan’s budget speech launched a pre-emptive strike on credit rating agencies, which last year raised doubts about South Africa’s ability to repay its growing debt.

Gordhan’s speech reiterated that, despite the outlook of the rating agencies, the country’s finances were strong.

This week, Gordhan revealed government would take steps to boost revenue and trim the budget deficit to 3% (R121.5 billion) of the gross domestic product by 2014 from 4.8% (R142.3 billion) this year. The deficit is the difference between the state’s revenue and its expenditure.

In a report by financial news agency Bloomberg, Gordhan vented his frustration about rating agencies lumping South Africa with the sovereign credit crisis in Europe that has left debt-stricken countries such as Greece, Ireland, Spain, Portugal and Italy having to impose unpopular austerity policies to curb unsustainable spending.

“One of the unfortunate things about countries like ourselves, which have a good record and have demonstrated the appropriate political will to manage our finances well, is that we get lumped with the problems of the rest of the world,” Bloomberg quoted Gordhan as saying.

Last November, Moody’s Investors Service downgraded its outlook on South Africa’s A3 local and foreign currency government debt ratings to negative from stable. In justifying its decision, the ratings agency expressed concerns about the talk of greater state involvement in the economy, which could result in uncontrolled spending.

Last month Moody’s peer, Fitch Ratings, followed suit and lowered the outlook on South Africa’s BBB+ rating to negative from stable, citing deteriorating external finances, slow economic growth and high unemployment as its reasons.

Gordhan felt that South Africa was being punished for the sins of others because credit downgrades invariably lead to lenders imposing higher interest on countries with poor credit scoring. They also help foreign investors when deciding whether to invest in a country.

South Africa borrowed more than it did six years ago.

The massive increase in infrastructure spending, spearheaded by state-owned enterprises (SOEs) power utility Eskom, and transport and logistics parastatal Transnet, led to the public sector borrowing requirement jumping to 7.1% of GDP this year from 4% in 2008.

In 2008, the state and its SOEs borrowed R91.1 billion from the financial markets and this year they were expected to borrow R235.1 billion.

Countering the perception held by the agencies, the finance minister predicted a steady growth in the economy and state revenues over the next three years. He said the economy would grow 3% this year, rising to 4.3% in 2014. On the other hand, advanced economies such as the US and Western Europe were projected to grow at a snail’s pace of 1.2% this year.

An inspection of South Africa’s fiscal position showed that the state would generate R904.8 billion in revenue this year, R1 trillion in 2013 and R1.1 trillion in 2014. State spending would reach R1 trillion this year, rising to R1.2 trillion in 2014.

While South Africa needed a good credit score in order to borrow cheaply offshore, it was not heavily reliant on overseas markets for funding.

Gordhan reminded the rating agencies of this fact.

“South Africa has deep and liquid capital markets, through which long-term capital can be raised at competitive rates by government, SOEs and the private sector. Our development finance institutions are capable of raising capital and co-financing investments of the private sector, state entities and municipalities,” he said in his budget speech.

Johann Els, senior economist at Old Mutual Investment Group SA, said the Treasury had no choice but to keep the budget deficit low, otherwise rating agencies would punish South Africa.

“If there is further fiscal slippage and they lift the headline numbers to 5.5% or 5.7%, the markets won’t like it, nor will the ratings agencies. I think that would be a move in the wrong direction,” he said.

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