Gordhan’s Budget Speech Not Just Enough To Save SA From Junk Status – Nomura

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While the finance minister presented his mid-term budget policy Speech (MTBPS) which is expected to help see SA out of junk status, a global market research group, Nomura said Gordhan’s Budget Speech isn’t good enough to save SA from junk.

The research group which took a great deal to assess the medium-term budget policy speech delivered by the minister on Wednesday said Gordhan’s Budget Speech took a ‘neutral’ stance on the country’s fiscal policy – but was stretching the pragmatism and space allowed by ratings agencies “to the max”.

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According to the group, the speech had both positives and negatives – with slightly wider headline and primary deficits, and debt numbers that surprised meaningfully to the upside. However, there “was nothing at all offered new on structural reforms”

“What was offered was simply the line that the existing plans and programmes of government were sufficient…for a speech so watched by markets and ratings agencies, (it is strange that) this better opportunity wasn’t used for that,” it said.

“As such, the MTBPS fails our key test question, which is exactly what the ratings agencies will be asking themselves: are there any reasons in this MTBPS to revise up long run potential growth estimates from their current 2.0-2.5% level? The answer to that is no,” Nomura said.

“We think there was nothing of note here that is new to shift the ratings agencies from their existing biases.”



The comment by Nomura echoes comment by SA economist Nazmeera Moola  who among other things needed by government to do to save the economy said, we will need to see a stabilization in the debt to GDP ratio over the course of the medium term expenditure framework. As stated above, the rating agencies do not want to see consolidated debt breaching 60% in the forecast period. This number is currently in the low 50% and barring any irresponsible liabilities, it shouldn’t breach 60%.

“As soon as there are a couple of months of stability like we saw between May and August, the data improves, so there is pent-up demand and the economy wants to grow.  However, as we have seen again this month, it is very fragile. This is why political stability is so important.

“It is not about Pravin Gordhan per se; it is about the continuation of conservative fiscal policy at National Treasury, which will make the ability to repay debt in the long term viable. Conservative fiscal policy means both controlling expenditure, but also not signing up to any irresponsible liabilities, be they direct or indirect.” Nazmeera Moola said.

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Meanwhile Nomura said about Gordhan’s Budget Speech that the probabilities of downgrades (to external debt ratings) as a result of the MTBPS is unchanged at a 40% probability for Moody’s; 60% for S&P and 80% for Fitch.

“It remains our baseline that S&P and Fitch downgrade,” it said adding that there was nothing in the budget speech to warrant off-cycle downgrade from rating agencies – however, should the political situation escalate and Gordhan gets removed, agencies would likely react immediately.

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