Mariam Isa
6 November 2009
Johannesburg — SA's ballooning budget deficit did not pose an immediate threat to its credit rating, but political will to restore fiscal discipline when the economy recovered could prove challenging, rating agency Standard and Poor's (S&P) said yesterday.
Trade unions are campaigning for the government to keep its fiscal stance expansionary over the next three years to allow more growth in official spending.
Deputy Finance Minister Nhlanhla Nene said yesterday that relying heavily on the government to support demand could not be sustained indefinitely, and the budget deficit must be curbed.
"If done for too long, public debt would rise to unsustainable levels, imposing a harsh cost on the next generation," he said in a speech at the University of
KwaZulu-Natal
"While it is appropriate for government to increase deficits during a crisis it must present a credible path back to a sustainable budget balance after the crisis has ended," he said.
"Failure to do so would mean lower growth for many years."
In its medium-term budget last week, the Treasury forecast its budget deficit would leap to 7,6% of gross domestic product (GDP) this year from 1% last year -- its highest since the early 1960s. It plans to reduce the shortfall to 4,2% of GDP by fiscal 2012-13.
"The projected trend is in the right direction, but forecasts change from year to year, so one can't take today's projections as written in stone," S&P credit analyst Remy Salters said.
"How committed the authorities will be to restore fiscal discipline ... may turn into a political question. It may become harder for the new administration to achieve consensus on fiscal policy when it is tightening rather than expanding."
Salters said challenges to SA's fiscus in the political context were the main consideration for S&P's investment grade rating for SA, which is BBB+, with a negative outlook.
Moody's Investors Service said this week SA could sustain a leap in official borrowing now with debt levels low. But it warned the trend could not be sustained indefinitely. Pressure for more "unaffordable" fiscal and monetary policies should be resisted. Moody's has given SA a higher A3 rating, with a stable outlook.
Credit ratings are important as they help determine the cost of a country's borrowing in foreign markets.
Salters said it made sense for SA to run large budget deficits in a recession, provided it was still possible to fund the shortfall, which was the case. But the leap in supply of government debt in the domestic market would make borrowing more expensive for the public and private sectors, he said.
Official debt is projected to rise from 23% of GDP this year to 41% in 2013.
Konrad Reuss, S&P's MD for sub-Saharan Africa, said another uncertainty was the extent of SA's recovery. "If there is a shortfall (in growth), to what degree would government be ready to increase taxes or cut spending?"
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