Markets wait to see if Nene can pull it off

FINANCE Minister Nhlanhla Nene's bold plan to curb budget deficits faster than expected, despite a sharp slowdown in growth, has impressed analysts and financial markets.

FINANCE Minister Nhlanhla Nene's bold plan to curb budget deficits faster than expected, despite a sharp slowdown in growth, has impressed analysts and financial markets.

But credit-rating agencies say it remains to be seen whether the ambitious targets can be met.

Nene said in his medium-term budget policy statement on Wednesday that spending ceilings would be cut, government costs contained and tax revenue increased to check the rapid rise in borrowing, which threatened to tip the country into a "debt trap".

Domestic bonds rallied and the rand strengthened after news of the policy shift, which Nene said was needed to protect development gains made during two decades of democracy, sustain social progress and move the economy to a more sustainable growth trajectory.

He warned that without the adjustments it was likely that SA's sovereign debt would be downgraded to sub-investment grade, otherwise known as "junk" status, risking impaired access to credit markets.

This is unlikely in the near term as only one rating agency - Standard & Poor's - has given SA the lowest investment-grade rating, which reassuringly has a stable outlook.

However, its rating from Moody's Investors Service still stands a good chance of being cut as it is two notches higher, and carries a negative outlook.

Weak economic growth would make it difficult for the Treasury to rein in the budget deficit and stabilise debt, said Kristin Lindow, senior credit officer and Moody's vice-president.

"The government's ongoing commitment to fiscal consolidation and renewed emphasis on structural reform and competitiveness indicate its determination to confront these circumstances to the best of its ability. However, the current poor investment climate and weak consumer and business confidence will pose considerable headwinds for these efforts," she said.

Nene slashed official growth forecasts for the economy, predicting it would expand 1.4% this year, 2.5% next year and 2.8% in 2016.

This compares with estimates of 2.7%, 3.2% and 3.5% respectively in the February budget unveiled by his predecessor, Pravin Gordhan. Nene now sees the economy achieving growth of only 3% in 2017.

"The lowering of the forecast shows there is no fire at all in this economy," said Konrad Reuss, S&P's managing director for SA and sub-Saharan Africa.

"Nene is willing to dish out pain, but it's too early to give him the benefit of the doubt because there is significant implementation risk," he said.

Nene has said the cabinet is fully behind the tough strategies he outlined on Wednesday.

Spending ceilings will be cut by R25-billion over the next two years, while spending growth slows to 1.3% annually from an estimated 1.8% in February.

These measures, together with additional tax revenue, are intended to limit the budget deficit to 4.1% of gross domestic product in the current financial year.

The shortfall is set to shrink to 3.6% next year, 2.6% in 2016/17, and 2.5% in 2017/18 - exceeding earlier predictions.

"The minister is being enormously pragmatic. If he can deliver, that will put SA into a much healthier position going forward," said Nazmeera Moola, economist at Investec Asset Management .

Nene has acknowledged that one of the biggest risks to the fiscal consolidation is the public- sector wage bill, which accounts for about 40% of noninterest spending.

He has budgeted for annual increases of 6.6% over the next three years, while public-sector unions have demanded an increase of 15% in the coming year - and threatened to go on strike to achieve that goal.