Government must cut spending to avert junk status in December: investment expert

Government desperately needs to earn more and spend less to avert a potential downgrade later this year. That’s the blunt message from investment management advisor Francois Botha‚ head of multi-management at Novare.

He was commenting on the decision by global ratings agency S&P on Friday evening to affirm South Africa’s rating at BBB-‚ with a warning that the outlook remained negative‚ reflecting the potential adverse consequences of low GDP growth.

“South Africa’s economic and political climate has deteriorated significantly‚ unemployment has increased‚ interest rates have spiked‚ and business and consumer confidence is low. The result of this is that the country’s GDP growth has slowed. Slow growth implies lower government revenue‚ higher fiscal deficits‚ weak investment spending‚ sluggish infrastructure roll-out‚ and rising social and political tensions‚ all of which are naturally credit-rating negative‚” Botha said.

“To avoid a downgrade later in the year the government will have to demonstrate a commitment to decrease spending.

“The government desperately need their income to increase.

“In order to do this the government will have to focus on measures which will grow the country‚ reduce the unemployment rate and increase the tax base.” The problem is that South Africa is already experiencing high inflation and the Monetary Policy Committee will likely impose further interest rate hikes this year to bring inflation back within the target band‚ Botha said.

“The result of this is that it will put further pressure on economic growth.

“If we don’t find a catalyst for growth within the next few months then a downgrade would be inevitable.”

S&P rating of SA’s debt is just one notch higher than sub-investment grade (BBB-). A downgrade to BB+‚ or junk would have put SA on a par with Russia‚ Indonesia‚ Turkey and Azerbaijan‚ among others.

Another review by S&P is due in December.