Finance Minister Pravin Gordhan’s focus on fiscal consolidation may be enough to ensure international credit rating agencies do not quickly revisit South Africa’s standing in the debt financing and investment markets.
But Nedbank chief economist Dennis Dykes says the state-led growth and consumption spending the country had experienced in recent years had to be converted to investment by the private sector to shore up growth and reassure rating agencies.
If South Africa gets slapped by the big three international agencies with a further downgrade of its investment rating to junk status, it could have disastrous consequences, including a rapid hike in interest rates, weakening of the rand and the flight of foreign money.
Dykes said last week’s budget had to show fiscal consolidation and a commitment to avoid further fiscal mistakes including bailing out SAA and the nuclear build and National Health Insurance programmes.
Interviewed after addressing members of the East London business community, Dykes said the numbers produced in Gordhan’s budget presentation – including keeping the deficit at 3.2% and net national debt at 46.2% of GDP – might have been sufficient to avoid a reappraisal by the ratings agencies of South Africa’s ability to repay its debt.
“But to really drive growth you need the private sector to invest. And for that you need investor-friendly policies. The jury is still out on that because the minister cannot announce policy changes in the budget. We’ll have to see what happens in the legislative programme.” Dykes said positive aspects of last week’s budget included the much faster rate at which government was committing to reducing the deficit. The constraints on government expenditure were commendable, as were maintaining the status quo on both personal and company taxes.
Other good features of the budget were the proposals on private sector partnerships with government and on removing bottlenecks in infrastructure delivery. Dykes said the government had also succeeded in aligning social spending with the country’s needs as reflected in the National Development Plan.
However, the budget had not provided details on “big ticket” items like the nuclear programme or National Health Insurance. There were some inconsistencies in policy and it was not clear how successful implementation of some proposals would be.
On private sector investment, Dykes said there was “natural reluctance” by companies to invest given global circumstances, commodity prices and the exchange rate.
As one example of policy lags, Dykes said private investment in power generation was hamstrung because there was no guarantee of either a long-term off-take agreement with Eskom or reasonable pricing that covered the cost of capital.
Instead of undertaking large capital projects in the public sector, government should agree to projects that could come on stream faster, he said.
Spotlight now on policy
But Nedbank chief economist Dennis Dykes says the state-led growth and consumption spending the country had experienced in recent years had to be converted to investment by the private sector to shore up growth and reassure rating agencies.
If South Africa gets slapped by the big three international agencies with a further downgrade of its investment rating to junk status, it could have disastrous consequences, including a rapid hike in interest rates, weakening of the rand and the flight of foreign money.
Dykes said last week’s budget had to show fiscal consolidation and a commitment to avoid further fiscal mistakes including bailing out SAA and the nuclear build and National Health Insurance programmes.
Interviewed after addressing members of the East London business community, Dykes said the numbers produced in Gordhan’s budget presentation – including keeping the deficit at 3.2% and net national debt at 46.2% of GDP – might have been sufficient to avoid a reappraisal by the ratings agencies of South Africa’s ability to repay its debt.
“But to really drive growth you need the private sector to invest. And for that you need investor-friendly policies. The jury is still out on that because the minister cannot announce policy changes in the budget. We’ll have to see what happens in the legislative programme.” Dykes said positive aspects of last week’s budget included the much faster rate at which government was committing to reducing the deficit. The constraints on government expenditure were commendable, as were maintaining the status quo on both personal and company taxes.
Other good features of the budget were the proposals on private sector partnerships with government and on removing bottlenecks in infrastructure delivery. Dykes said the government had also succeeded in aligning social spending with the country’s needs as reflected in the National Development Plan.
However, the budget had not provided details on “big ticket” items like the nuclear programme or National Health Insurance. There were some inconsistencies in policy and it was not clear how successful implementation of some proposals would be.
On private sector investment, Dykes said there was “natural reluctance” by companies to invest given global circumstances, commodity prices and the exchange rate.
As one example of policy lags, Dykes said private investment in power generation was hamstrung because there was no guarantee of either a long-term off-take agreement with Eskom or reasonable pricing that covered the cost of capital.
Instead of undertaking large capital projects in the public sector, government should agree to projects that could come on stream faster, he said.
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