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Both Moody's Investors Service and Fitch Ratings have kept their investment grade ratings for South Africa, following the Government's stated commitment to pursue further fiscal consolidation.
On October 26, South Africa's Minister of Finance, Pravin Gordhan, released the 2016 Medium Term Budget Policy Statement (MTBPS). This proposed to raise an additional ZAR43bn (USD3.1bn) through tax measures over the next two fiscal years.
Tax revenue growth has declined this fiscal year, mainly due to slower economic growth. Gordhan will therefore propose tax measures in the 2017 Budget to raise an extra ZAR13bn in the 2017/18 fiscal year.
Combined with the proposals announced in the 2016 Budget, this would boost revenues by ZAR28bn in 2017/2018. Measures to raise additional revenue of ZAR15bn will also be proposed for 2018/19.
While postponing judgment on South Africa's Baa2 (with a negative outlook) long-term rating, Moody's pointed out that low economic growth and tax revenue shortfalls "are driving an increase in government debt to gross domestic product (GDP) ratios."
"Implementing the fiscal consolidation targets set out in the 2016 MTBPS will be key if South Africa is to preserve macroeconomic credibility and boost investor confidence," it added. "In Moody's view, the Government will stay within its expenditure ceilings, but meeting revenue targets will be challenging in the weak economic environment."
Fitch also maintained its investment grade rating for South Africa, although only just. Its BBB-rating (roughly one notch below Moody's, and only one notch above non-investment grade status) has now been assigned a negative outlook.
"As a result of low GDP growth and weaker-than-expected tax revenues," Fitch said, "the Government in its MTBPS raised the budget deficit forecast for the fiscal year ending March 2017 to 3.4 percent of GDP from 3.2 percent in the February budget. The deterioration would have been worse without the Government's decision, announced in the MTBPS, to raise additional revenue."
Fitch noted that, although the Government has not announced which taxes are to be raised, its fiscal targets "now look only mildly optimistic." However, Fitch's rating was said to reflect "South Africa's weak growth prospects relative to the 'BBB' category median, with important repercussions for public finances." Among the risk factors that could result in a Fitch downgrade were "a failure to stabilize the government debt/GDP ratio, [and] a failure of GDP growth to recover sustainably."
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