Deficit cut alone can’t stop S. Africa downgrade, Gordhan says

South Africa can’t avoid a credit-rating downgrade with good fiscal numbers alone, Finance Minister Pravin Gordhan said.

“There was a time when ratings agencies would take their matrix and tick the boxes to say ‘fiscally you look sound,’” Gordhan said at a post-budget briefing in Johannesburg on Thursday. “In the last six years the goalposts have shifted” and now include fiscal stability, indebtedness, where growth is going to come from and the political economy, he said.

Gordhan, 66, faced a difficult balancing act on Feb. 24 in his first budget since being reinstalled to the job in December. He cushioned low-income earners by targeting tax increases at the wealthy and cut spending plans as he sought to support an economy set to grow at the slowest pace since the 2009 recession without increasing the debt burden.

South Africa is at risk of losing its investment-grade credit-rating status because of slowing growth and rising debt. Standard & Poor’s has a negative outlook on the nation’s sovereign rating of BBB-, which is one level above junk, and Fitch Ratings Ltd. has a stable outlook on its similar assessment.

“It doesn’t matter if it’s too little too late, let’s give it our best shot,” Gordhan said on whether the measures in the budget were enough to avert a downgrade. “If it was too late, at least the people will say we tried.”

Investors are already pricing in a credit-rating downgrade for South Africa. Credit default swaps, used to insure the nation’s debt against default for five years, are higher than that of Turkey and Russia, which are both rated junk by S&P. The rand weakened 1.1 percent to 15.7178 per dollar as of 4:40 p.m. in Johannesburg on Thursday, extending the decline in the past year to 25 percent.

The budget projected the fiscal shortfall will narrow to 2.4 percent of gross domestic product in three years from a projected 3.9 percent this year, according to the Budget Review. Gross debt will rise to more than 50 percent of gross domestic product for the first time in at least 25 years.

Treasury officials will start a non-deal roadshow on March 7 to present the budget to investors and ratings companies in the U.K. and U.S., Gordhan said. Some business leaders, who have been meeting with Gordhan and President Jacob Zuma, will join the roadshows.

Minister Shuffle

Gordhan is seeking to restore policy credibility after Zuma sent the rand and bonds reeling when he unexpectedly fired Nhlanhla Nene as finance minister in December and replaced him with a little-known lawmaker, David van Rooyen. The market fallout and lobbying by business leaders led Zuma to backtrack on his decision four days later and reappoint Gordhan to a position he had held from 2009 until 2014.

The rand fell the most in four years on Feb. 26 because of concerns that Gordhan would resign over a dispute with his tax chief, Tom Moyane, a Zuma ally. The president’s office issued a statement on Feb. 29 backing Gordhan and denying any rift between Zuma and the finance minister. The president is “dealing with the matter of the South African Revenue Service Commissioner and the Minister of Finance through the correct channels using correct legal prescripts,” the cabinet said in a statement on Thursday.

“I leave it to the president to give us the kind of direction that we need to take,” Gordhan told reporters about his relationship with Moyane. “At the end of the day what you want is a professional set of relationships and a professionally run institution which focuses on its core business.”

– Bloomberg