Rating agency Standard & Poor’s (S&P) has issued another warning in under two months, saying SA is headed for a tough year due to its sluggish economic growth and the lingering threat of junk status.
Earlier this month, the International Monetary Fund slashed SA’s economic growth forecast to less than 1% this year, making it one of the more pessimistic.
The government is projecting gross domestic product (GDP) growth of 1.7% this year.
In a report on ratings trends in sub-Saharan Africa released on Monday, S&P cautioned that the bailout of state-owned enterprises, along with weak GDP growth, would see SA miss its fiscal targets. Among the outcomes of missed targets would be a costly budget deficit widening, which would force the government to borrow more or raise taxes to close the gap.
“Lower-than-expected gross domestic product growth, combined with government’s exposure to weak state-owned enterprises like Eskom, could pose a risk to the government achieving its fiscal targets” and ratings, said S&P.
Options for raising revenue included an increase in value-added tax (VAT), a tax on the asset holdings of the wealthy, raising excise taxes and clamping down on illicit flows of funds out of the country, said Mercantile Bank consulting economist Trudi Makhaya.
Last month, S&P warned that extremely low economic growth, large budget deficits and policy uncertainty could lead to a downgrade to junk. These were among issues also raised last month by Moody’s and Fitch.
S&P’s BBB-rating of SA is the lowest investment grade rating and its negative outlook on the rating means a downgrade is possible if there is no improvement in economic fundamentals. Slow economic growth was “at the core of SA’s problems” and exacerbating this was poor European demand for SA’s manufactured goods, muted Chinese demand for its key hard commodity exports and weak business confidence, S&P said.
Currency weakness was expected to continue in sub-Saharan Africa, with the S&P report stating: “Exchange rate pressures are likely to remain pertinent in 2016 as global liquidity conditions continue to tighten … while expectations of low commodity prices remain.”
Fragile currencies and the resultant inflationary pressures had led the central banks of Zambia, Kenya, Ghana, SA and Uganda to look to raising interest rates despite such action pushing up the cost of financing.
The South African Reserve Bank is forecast to raise interest rates by 25 basis points on Thursday to tame rising inflation.
The US Federal Reserve’s decision last month to raise interest rates was a cause of capital flowing out of emerging markets.
In SA, even though 90% of the total general government debt stock is in local currency, about 34% of it is held by foreign investors, making the country vulnerable to global investor sentiment, relative returns and differing policy decisions elsewhere, according to S&P.
The biggest challenge in two of Africa’s other big economies, Nigeria and Angola, would be low oil prices, which have fallen to about $32 a barrel from an average of almost $60 last year.