RTRS:S.Africa rating at risk as euro crisis curbs growth
* Govt may be pressured to spend more, but growth lags
* Debt levels could push past Treasury's limit
* Investors increasingly wary about fiscal ill discipline
By Xola Potelwa
JOHANNESBURG (Reuters) - South Africa is at risk of breaching its debt ceiling as economic growth and tax revenues are being hit by the impact of the euro zone debt crisis, raising the risk its credit rating will be downgraded in the near future.
While public debt at around 30 percent of GDP would be the envy of many advanced economies, it has been rising steadily, prompting Moody's to cut the outlook on South Africa's A3 rating to negative last month.
The government vowed in October to tighten spending once the debt-to-GDP ratio hits 40 percent, but with national elections looming in 2014, the risk is that it could loosen up on fiscal discipline in favour of vote-catching spending programmes.
The euro zone is the country's largest trading partner and South African policymakers have voiced concern that Europe's deteriorating economic outlook will spill over to Africa's largest economy and constrain growth.
The proportion of South African exports destined for Europe has fallen to 23 percent from a third in 2010, contributing to a wide current account deficit, at 3.8 percent of GDP in the third quarter, that leaves South Africa vulnerable in the event of sharp capital outflows.
Finance Minister Pravin Gordhan cut the government's growth forecasts in October for this year and the next two years, citing the global economic outlook as a risk that will also result in lower-than-expected government revenue.
That would add to a public debt burden that rose to 30 percent of GDP in 2010/11, from 22 percent of GDP in 2008/09, and is seen reaching 43 percent in 2013/14.
The government recently raised its budget deficit forecast for this fiscal year through March 2012 to 5.5 percent of GDP, from 5.3 percent, and sees it staying above 5 percent, though falling slightly, in 2012/13.
"South Africa's debt is already increasing quickly and there is no certainty that (the country) has the political direction to get deficits down from higher levels, if it's allowed to go too far," said Peter Attard-Montalto, emerging market economist at Nomura. "It risks triggering downgrades."
Moody's, putting South Africa on credit watch, said political pressure could undermine the government's commitment to low budget deficits and its ability to keep within current debt targets.
Gordhan has said revenue is expected to be 13 billion rand lower than initially forecast this year, and it could take four years for it to recover to pre-recession levels.
George Glynos, managing director at market analysts Econometrix Treasury Management, said a ratings downgrade would be triggered not so much by a breach of the 40 percent debt ceiling but by a perceived lack of fiscal discipline.
"It will be more about whether or not there's some fiscal discipline. It's about the underlying trend and the philosophical debates that government are having about how to deal with a deficit at a time when you have some significant social needs to balace off against that," Glynos said.
POLITICAL, BUDGET PRESSURE
While economic growth is expected to stay above 3 percent this year and next, and rise to 4.1 percent in 2013, that is less than half the growth rates seen in some other emerging economies such as China, India or Turkey.
With unemployment stubbornly high at 25 percent of the labour force as a million people have lost their jobs since the recession in 2009, South Africa is in a tight spot.
The government says economic growth needs to average 7 percent annually to have a meaningful impact on unemployment.
Millions of mostly black people continue to live in poverty and squalor and are becoming increasingly impatient with the ruling African National Congress (ANC), which, 17 years after the end of white minority rule, has failed to improve their plight.
The ANC plans to introduce universal health insurance to give the poor access to quality health care, in a scheme, due to be phased in from 2014, that will cost an estimated 255 billion rand by 2025.
While the government can ill-afford such a major expenditure, analysts say it might yet be tempted to bring the health plan forward before the 2014 elections and spend more on job creation to please voters.
"If you are going to look after the money first and foremost, that will get you your best credit rating - but it probably won't get you that many votes," ETM's Glynos said.
Finance Minister Gordhan said last month he saw no need for policy changes to deal with the impact of the euro zone debt crisis. The government faces a delicate balancing act, however, as pressure from unions and black voters for more spending to ease unemployment is mounting.
In October 2,000 youths took to the streets of Johannesburg in protest at the lack of jobs as a study by the South African Institute of Race Relations showed half of 25-to-34-year-olds out of work had little chance of ever finding a job.
Ratings agency Fitch, which rates South Africa one notch lower than Moody's at BBB+, said last month it was concerned about South Africa's deficit-reduction plans as revenues could fall below target next year given that economic growth is likely to slow. It will release a review of its rating next month.
"Competing spending priorities are much more difficult to balance in a low-growth scenario," said Anne Fruhauf, sub Saharan analyst at Eurasia Group.
"Current fiscal constraints are largely the result of economic turmoil, not reckless spending. But the question investors are asking increasingly is: just how much room is there for fiscal slippage?"
