Fitch says South Africa’s budget highlights deficit challenges

Fitch director for sovereigns Carmen Altenkirch said the rating agency had previously highlighted that weak economic growth and a failure to boost potential growth were a negative rating trigger.

The outlook for public finances would form an important part of Fitch’s next scheduled review of SA’s sovereign ratings on June 5, the agency said on Thursday.

Ms Altenkirch said Fitch’s sovereign credit rating for SA of BBB with a negative outlook recognised economic growth and fiscal consolidation challenges, while acknowledging the economy’s credit strengths and shock-absorbing capacity through a floating exchange rate, strong banking system and financing flexibility afforded by a high share of local-currency debt with long maturity.

Finance Minister Nhlanhla Nene revised the economic growth forecast for 2015 lower to 2% from 2.5% in his budget speech on Wednesday.

“Downward revisions to growth forecasts have become regular in recent years, reflecting among other factors, electricity shortages and divisions in the labour market,” Ms Altenkirch said.

Fitch said efforts at implementing SA’s development framework — the National Development Plan — remained “piecemeal, raising concerns about its effectiveness in boosting growth to the eventual target of 5%”.

Mr Nene announced a small increase in personal income taxes and the electricity levy, but announced a steep increase in the total fuel levy of 80.5c a litre.

Fitch said measures totalling a net R8.2bn for the current fiscal year appeared to “fall well short of” the Treasury’s announcement in October of raising revenue by R27bn over the next two years.

The agency said details of the Davis Tax Commission, whose findings were expected to have been included in the 2015 budget, would only be released later this year — suggesting more tax increases might come in next year’s budget.

With wage negotiations under way between the government and unions representing about 1.3-million public servants, the government said it had budgeted for a public sector wage growth of 6.6%.

Fitch said a key risk to public finances was that wage negotiations under way settled above 6.6%

Source: BusinessDay, South Africa