South Africa’s rand falls as Moody’s project slow growth

South Africa’s rand fell 14.47 to a dollar on Thursday as ratings agency Moody’s warned that the pace of South Africa’s fiscal consolidation will be slower than government forecasts due to weaker than expected economic growth and a rising public sector wage bill act as fiscal headwinds. The government had expected to hit fiscal deficit of 3.5 percent this year, but it may not be possible until 2020-21, according to a report released by Moody’s on Wednesday.

However, a report Government of South Africa: Fiscal slippages likely this year, but medium-term targets remain within reach by the ratings agency noted that regardless of the slower pace of fiscal consolidation, medium-term deficit targets are achievable and, if met, will support a stabilization of debt levels and reinforce
Moody’s assessment of the sovereign’s fiscal and institutional strengths.

“We expect a slower pace fiscal consolidation than the Government of South Africa is forecasting,” said Lucie Villa, a Moody’s Vice President, Senior Credit Officer and co-author of the report. “Growth this year is expected to be lower than the government’s own estimates, weighing on tax revenues, while the public sector wage agreement in June also brings extra, unbudgeted costs.”

The South African Reserve Bank supported Moody’s stance on Wednesday in its presentation to parliament. According to the central bank, South Africa’s economic growth in 2018 will be “much lower” than expected, with any recovery likely to be “weak and choppy”.

Moody’s is the last of the “big three” ratings agencies to still have South Africa’s sovereign rating in investment grade. Reports that suggest this could change any time easily unsettles the market, hence rand’s poor performance. The currency seemed to recover fully on Wednesday, with the rand trading against the dollar at 14.57 from a low of 14.24 a day earlier.

Moody’s expects South Africa to incur a fiscal deficit of around 4.0 percent of GDP in 2018-19, implying a 0.4 percentage point of GDP shortfall from government targets. It also expects debt to stabilize at around 56 percent of GDP.

However, the ratings agency expects South Africa to make near-term fiscal adjustments on the spending side and tax collection by the South African Revenue Service to improve.
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