Poor economic conditions might dent South Africa's investment profile

12 March 2019 Consultancy.co.za

Despite the words of promise delivered by Finance Minister Tito Mboweni in this year’s budget speech, South Africa’s profile as a destination for investment is likely to deteriorate on the back of public debt and deficits, according to PwC Strategy& Economists Lullu Krugel and Christie Viljoen. 

Much has been riding on South Africa’s budget speech this year. The country is emerging from a period of sustained economic stagnation, and the new government has vowed to make South Africa a hub for foreign investment through the development of a more transparent regulatory and business environment.

The country also suffers from a high rate of tax defaults, and the decision to hike tax rates in last year’s budgets did little to restore the levels of financing in public coffers. As a result, the government has decided to heavily tax wealthy South African expats earning in excess of R1 million, alongside other tax reforms.

The focus, however, was a restructuring of public agencies such as Eskom and regulatory bodies to make them more open and efficient. According to PwC Strategy& analysts, these measures might create an environment of optimism in the country, but the conditions are likely to prompt Moody’s Investor Service to demote South Africa to non-investment grade this year.Lullu Krugel, PwC South AfricaCommenting on Mboweni’s speech, Economist Lullu Krugel said, “His address was forthright about the challenges facing the country, and while there were many bitter pills to swallow in the detail, the minister provided some good news – for rating agencies – on key subjects like Eskom and the public sector wage bill.”

On the other hand, she added that “These sweet words, depending on whose ears it falls, can, however, not detract from the wide budget deficit and huge debt that the public sector is struggling with.” National Treasury figures place South Africa’s projected growth for this year at a dismal 1.5%.

Given the conditions, Bloomberg has predicted that Moody is likely to downgrade South Africa’s status, which, according to Mboweni, will only harm the country’s economic prospects. Krugel explained the precise nature of the struggle that South Africa would be faced with if downgraded.

“If rating agency Moody’s Investors Service were to also downgrade the debt to sub-investment level, South Africa would be removed from the Citi World Government Bond Index. This would prompt asset managers and pension funds to sell billions of rands worth of domestic bonds. This would sharply increase the cost of debt and pressure the exchange rate,” she said.

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