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Cape Town - The credibility of the SA government was weakened by the abrupt and multiple changes in the minister of finance position in December, ratings agency Moody's said on Thursday.
The agency pointed out that the Monetary Policy Committee (MPC) of the SA Reserve Bank (Sarb) revised its forecast for the country's growth in gross domestic product (GDP) to 0.9% - a credit negative - from the 1.5% it had projected in November.
This is Sarb’s third downward revision to its 2016 real GDP growth forecast in as many meetings.
The subdued 2016 forecast falls within Moody's own 0.5% to 1.5% forecast, and is similar to the International Monetary Fund (IMF) forecast of 0.6%, and the World Bank’s 0.8% forecast. Sarb also reduced its forecast for 2017 growth to 1.6% from 2.1%.
Moody's said low and declining real GDP growth was a key driver of the negative outlook it assigned to South Africa in December.
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"Lower growth is credit negative for the sovereign, because it will hamper efforts to raise tax revenues and broaden the tax base," cautioned Moody's.
Current levels of tax and other government receipts fall short of the government’s spending needs by 3% to 4% of GDP annually.
"Even though the National Treasury has budgeted conservatively for the current fiscal year and next, including an accurate assumption of very weak corporate income tax revenues, the near-zero growth rate is a significant further downward shift in the already narrow tax base that buoyant tax elasticities cannot overcome," explained Moody's.
A further decline in growth is likely to additionally dampen revenues.
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In Moody's view it will be challenging to maintain a sound fiscal position at a time when the government faces difficulties adhering to its spending ceiling.
In turn, a widening fiscal deficit combined with reduced growth will delay stabilising and reversing the rising public debt/GDP trajectory, bringing the ratio to more than 50% for the first time in more than a decade.
"The latest cuts in 2016 and 2017 growth will hamper investment, including in infrastructure and human capital, further lowering potential long-term growth. This is likely to contribute to prolonged high unemployment and worsening social tensions," warned Moody's.
"More immediately, lower growth will reduce the fiscal space needed to tackle the effects of South Africa’s most severe drought in decades."
According to the World Bank, the drought has already pushed an additional 50 000 people below the poverty line of R501 ($31) a month.
Factors that impacted growth include low commodity prices, a declining demand from China, electricity shortages, subdued consumer and business confidence, the drought and tightening financial conditions owing to rising interest rates.
Sarb raised the repo rate to 6.75% because of inflationary pressures and the challenges to stay within its targeted inflation range.
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