November 18, 2011 · 0 Comments
Last week Moody’s lowered South Africa’s credit-rating perspective from balanced to negative. Increased public spending demand as well as an amplified political risk was cited as primary reasons for the downgrade. The main concern is that societal and political strain is building up at a time when economic growth is dropping to 3% – 3.5%. This rate of development is simply too inadequate to offset South Africa’s rising unemployment levels.
Moody’s believes that South Africa’s political obligation to lower budget shortages and the competence to keep within debt goals could be weakened by prominent pressures and increasing enclosed tasks within the ANC and its trade union allies.
The International Monetary Fund (IMF) has however, disregarded Moody’s concerns that wavering state spending, cautions to raise South Africa’s debt problem beyond feasible levels. Abebe Selassie, IMFs assistant director for Africa, believes the pressures on the South African state’s spending were not overwhelming and he is of the view that the government’s anti-repetitive fiscal policy as supportive of the economy.
Selassie does however, realise that there is a need to moderate spending growth. Spending growth that was moving forward has to be more held back than it was in the past. This reflected a united view of the government when referring specifically to Finance Minister, Pravin Gordhan’s Medium-Term Budget Statement.
In order to contain debt which is expected to increase from a moderate 27% to an unsustainable 40% by 2015, government will have to rein in spending. The fastest developing item of state spending, namely debt service costs, is forecast to increase from R76.9 billion this year to R115 billion by 2015.
The next two years will be challenging for South Africa, but the statistical chances of a negative vision being pursued by an actual downgrade are only one in three.
Moody’s has always given South Africa’s economic policy makers the benefit of the doubt and so far it has been justified. So the fact that Moody’s assurance has now begun to waver, is rather unsettling. The continuous negative impact on private investment, coming from calls
for nationalisation and other quick fixes that look to implement black economic opportunities, was also noted.
A declaration was announced by National treasury which disagreed with Moody’s evaluation of political risk. It contended that a brisk exchange of policy options should not be deduced as political instability.
Sanlam economist, Jac Laubscher, suggests otherwise. He believes that Moody’s declaration could be substantiated on the grounds of South Africa’s worsening trend in public finance, without aid to political arguments. In truth, South Africa has experienced an acute decline in its fiscal position since 2008. Even though in 2009, it experienced a rather mild recession.
Treasury’s hold on South Africa’s public finances is slipping and it would suit the country best to consider the message enclosed in the ratings outlook downgrade, recognise the errors of the past three years and restore fiscal conduct.
– Donnique Burger, Web Journalist