South Africa’s reinforced spending ceiling is important for the nation’s credit rating, according to Moody’s Investors Service.
“This is something that we attach a lot of importance to,” Moody’s Vice President and Senior Credit Officer Aurelien Mali said in interview at the African Development Bank’s annual meetings in Lusaka, Zambia’s capital, on May 24. “The fact that there is quite a strong expectation that the ceiling will be respected means that the fiscal outcome is very likely, and therefore the debt should stabilize.”
Finance Minister Pravin Gordhan pledged in his February budget to narrow the fiscal deficit and limit gross debt to 50.5 percent of GDP by 2019 by curbing spending and raising taxes. Gordhan was reappointed in December to the post he held from 2009 until 2014 after President Jacob Zuma backtracked under pressure from business leaders and senior ruling party officials on his decision to replace former finance minister Nhlanhla Nene with a little-known lawmaker.
“It was calming for the markets that Gordhan was appointed, he is a safe pair of hands,” Jan Friederich, analytical head for the Middle East and Africa at Fitch Ratings Ltd., said in an interview in Lusaka on Thursday. “But with the developments since then, we are not entirely sure that has completely reinstated the ‘status quo ante’ in terms of allaying the fears that there was a shift in sentiment on the side of the presidency towards fiscal consolidation.”
Business leaders including Sim Tshabalala, the joint chief executive officer of Standard Bank Group Ltd., Africa’s biggest lender by assets, have met with Gordhan and Zuma to come up with measures to boost the economy. Still, political upheaval, including court judgments against Zuma and a report in the Sunday Times newspaper that Gordhan would be arrested for espionage, citing unnamed sources, have battered confidence in the economy.
“Of course, there are execution risks,” Mali said. “There is a lot of political noise, but we think it has been very clear from the authorities and also from all the partners in the economy from the private sector, from the public sector, that they want to change the current environment and improve the working relationship between all the groups to put back South Africa on a strong growth path.”
The nation’s institutional resilience, including its well functioning courts, “outweighs the immediate noise,” Gordhan said in an interview published in Financial Mail this week.
Moody’s Investors Service affirmed the continent’s most-industrialized economy’s credit rating at Baa2, two levels above junk, on May 6 after putting the nation on review for a downgrade two months earlier, and kept its outlook on the rating on negative. S&P Global Ratings will publish the result of its review on June 3 and Fitch Ratings Ltd. is also examining its rating. Both companies have South Africa one level above junk and S&P changed the outlook on its assessment to negative in December.
“When a negative outlook is assigned to a country there’s a certain amount of time given to try and put things right,” Razia Khan, head of Africa research at Standard Chartered in London, said in an interview in Lusaka on Wednesday. “So it’s not automatic that we will see a downgrade in June, but there could be a period of breathing space just to see how South Africa does get around things with its fiscal consolidation intent.”