Restraint not a game changer for ratings
Despite high marks for fiscal prudence, South Africa's budget did nothing to change the negative outlooks which Moody's and Standard & Poor's - the two top global rating agencies - have placed on their sovereign credit ratings for the country.
They welcomed news that the budget deficit came in lower than expected last year and was projected by the Treasury to sink below 3% of gross domestic product (GDP) within three years as government spending remains in check.
But neither considered that this was enough to warrant changing their outlooks for South Africa's sovereign rating to stable, although each had different concerns.
A negative outlook implies that there is a risk of a credit rating downgrade, which would tarnish investor perceptions of the country and raise its cost of borrowing.
"The budget was in line with our expectations - it's fairly prudent and continues fairly tight management of expenditure. But it's not a game-changer," said Ravi Bhatia, sovereign ratings director at Standard & Poor's.
Bhatia said it was a mistake to assume that credit rating agencies took only a country's debt metrics and fiscal story into account in making decisions on their ratings.
They also looked at its political situation, economic structure, growth outlook and monetary policy.
"The biggest concern we have is around growth - it's just not strong enough to take the economy forward," he said.
"But there should be some rebound in the global economy this year, which should bode well for South Africa after very poor growth last year."
The economy expanded by 1.9% last year, its slowest pace since the recession during the global downturn in 2009.
The Treasury revised its growth forecast for this year down to 2.7% from 3% in October, and predicts the pace will quicken to 3% next year, 3.2% in 2015 and 3.5% by 2016.
Many analysts think this outlook is optimistic given the risks posed by electricity constraints, protracted labour disputes and high inflation, which are all acknowledged by the Treasury.
Rising interest rates are also seen as a threat after the Reserve Bank raised its key repo rate by half a percentage point last month.
A lower pace of growth also puts upward pressure on debt to GDP ratios, which are key in assessing a country's creditworthiness.
It was mainly this that forced the Treasury to raise its forecasts for gross debt as a ratio of GDP for the next three years, predicting it will peak at 48.3% in the financial year 2016/17.
This is worrying as it points to a steep deterioration in the trajectory since 2010/11, when the ratio was 36%.
Kristin Lindow, senior vice-president at Moody's, was not perturbed by the trend, saying the budget was mainly "credit positive" due to its focus on fiscal consolidation.
"Also credit positive are the compositional changes in spending and borrowing: more of the budget is going towards investment than previously, which is meant to overcome the growth constraints posed by infrastructure shortfalls," she said.
Moody's expects the economy to grow at a pace faster than the Treasury expects over the next three years.
But Lindow warned that if the external environment was less buoyant than expected, if there was another steep depreciation in the rand that unsettles foreign investors, or if inflation and interest rates rose much more than expected, the fiscal outcome would be "less favourable than projected".
Finally, if the general election in May leads to a more populist strategy by the government, "we would see more reticence from foreign investors to participate as actively in the local bond market, which would have negative consequences for the cost and availability of funding", said Lindow.