South Africa Cuts Deficit Forecast and Moves to Weaken the Rand in Budget

South African Finance Minister Pravin Gordhan raised his growth forecasts and cut the estimate for the budget deficit, pledging to use some of the extra funds to finance foreign-currency purchases to weaken the rand.

The economy will expand 3 percent this year and 3.5 percent in 2011, compared with the February forecasts of 2.3 percent and 3.2 percent, the National Treasury said in the medium-term budget statement released in Cape Town today.

“South Africa’s economic recovery continues to gain momentum,” the Treasury said. “Stronger spending by households and income from high commodity prices has been supported by expansionary fiscal and monetary policy and low inflation.”

Growth remains below the 7 percent the government says is needed to create 5 million jobs over the next decade, partly because a strong rand is limiting the expansion of exports. The Treasury said it would use increased revenue to help the central bank buy foreign currency, and allow South Africans to take more money out of the country as it attempts to weaken the rand.

The currency has gained 34 percent against the dollar since the start of last year because of surging capital inflows into emerging markets, undermining the competitiveness of mines and factories and adding to unemployment.

The jobless rate was little changed at 25.3 percent in the third quarter, the statistics agency said yesterday.

Overvalued

“There is no doubt the overvaluation and appreciation of the rand has had an impact on our exporters,” Gordhan told reporters. “We need to help them to survive and to thrive.”

Allied Electronics Corp., which invests in companies that make communications equipment and power cables, and Sasol Ltd., the world’s biggest maker of motor fuel from coal, both based in Johannesburg, have complained in the past two months that the rand is undermining their profits.

The rand traded at 7.0266 per dollar as of 3:18 p.m. in Johannesburg from 7.0405 before Gordhan started his speech and 6.9431 late yesterday. The FTSE/JSE Africa All Share Index fell for a second day, declining 0.3 percent at 30,046.31.

The Treasury has taken “a meaningful, albeit cautious, move on the currency,” Peter Attard Montalto, an economist at Nomura Plc in London, said in e-mailed comments. “Today’s move should make investors think twice about the rand being a one-way bet, but equally does little to dampen its attractiveness overall.”

Coordinated Action

“Further steps to moderate the impact of capital flows on the South African economy will be considered, drawing on international experience and assessments of the likely impact,” Gordhan told lawmakers.

Bank of Korea Governor Kim Choong Soo today said the nation may consider imposing capital controls to slow fund inflows. Thailand has already said it will remove a 15 percent tax exemption for foreigners on income from domestic bonds, and Brazil has said it will raise a tax on foreign investments in fixed-income securities to 6 percent.

South Africa’s central bank Governor Gill Marcus said on Oct. 19 that the government should consider tax incentives or subsidies to support manufacturers hardest hit by the rand’s gains, a suggestion raised by the International Monetary Fund in a Sept. 21 report.

The bank, which has foreign currency reserves of $44.1 billion, can do little on its own. The bank lost 1.05 billion rand ($149 million) in the year through March and can’t afford to build reserves more quickly because it earns less in interest on foreign-currency reserves than it pays out on the bonds it sells to soak up excess liquidity.

Exchange Controls

The Treasury said it will scrap a 10 percent levy it charges emigrants to take funds in excess of 8 million rand out of the country, and allow residents to invest 4 million rand a year offshore. Individuals are currently restricted to investing a total of 4 million rand outside the country.

“In the short-term it’s not going to have much impact,” said Elna Moolman, an economist at Renaissance BJM, a Johannesburg-based stockbroker. “It’s not entirely clear that individuals will be in a hurry to take money out of the country.”

Gordhan said he expects tax receipts for the year through March to be 31 billion rand higher than previously forecast, enabling him to trim the budget deficit to 5.3 percent of gross domestic product from the 6.2 percent estimated in February. The deficit is narrower than the 5.5 percent median estimate of nine economists surveyed by Bloomberg. The Treasury expects the budget gap to narrow to 4.6 percent of GDP in fiscal 2012 and 3.9 percent deficit the following year.

Spending Plans

Planned government spending over the next three years was little changed from the February budget, even after public sector unions won 7.5 percent pay increases after a 20-day strike. The settlement will add 6.5 billion rand to the government’s wage bill this fiscal year, and annual increases should be limited to 6.3 percent for the next three fiscal years, Gordhan said.

“It’s very encouraging that given all the political pressure to widen the deficit that they are still sticking with the plan to bring the deficit down,” Moolman said. “What’s absolutely clear is the need to reduce debt and debt servicing costs.”

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Gordon Bell at gbell16@bloomberg.net.

To contact the editor responsible for this story: Peter Hirschberg in Jerusalem at phirschberg@bloomberg.net.

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