S&P not as upbeat on deficit as other agencies
July 28, 2009
By Ethel Hazelhurst
Despite improved confidence in South Africa's economy by rating agencies, Standard & Poor's (S&P) predicts the government's budget will show "a larger-than-expected deficit owing to significant revenue shortfalls already anticipated by the National Treasury".
S&P credit analyst Remy Salters said: "After running surpluses close to 1 percent of gross domestic product (GDP) in fiscal years 2007 and 2008, we expect the general government will return to deficits for the foreseeable future."
However, the report said "the ongoing fiscal expansion" did not pose "a fundamental debt sustainability problem for the South African government, provided it is reversed as the cycle improves".
S&P said the government issued a $1.5 billion bond in May (R11.6bn at yesterday's rate) and said it would issue foreign bonds in fiscal 2011 and 2012, but it pointed out "the bulk of the financing needed for the increased deficits is to come from the domestic market".
This has consequences for domestic interest rates, as the government's demands on the local capital market will drive long-term interest rates higher, which, in turn, will raise the state's borrowing costs.
"Furthermore, if the public sector's fiscal expansion were perceived to be excessive, this could affect the risk appetite of non-residents, increasing the risk of a renewed exchange rate adjustment," S&P said.
The agency suggested the Treasury might make budgetary revisions, increase foreign borrowings, increase state-owned enterprises' borrowing from foreign non-commercial sources, stagger investment in state-owned enterprises or draw on cash balances held at the central bank for monetary policy purposes.
In a vote of confidence, Fitch Ratings affirmed the country's BBB+ sovereign rating.
"South Africa is weathering the global recession and credit crunch quite well compared with its rating peers," said Veronica Kalema, the director at Fitch's sovereign group.
"Although GDP will fall by up to 2 percent this year, this will be far less than most BBB category sovereigns."
Other countries rated BBB+ were Estonia, whose economy was set to shrink by 13 percent this year; Libya, which should post 3.4 percent growth; and Mexico, with shrinkage of 5.5 percent, said Kalema.
On South Africa, Fitch said: "Political risk has eased since (the) smooth transfer of power to President Jacob Zuma."
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