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Gordhan Scrambles to Reassure Investors on S. Africa Budget
South African Finance Minister Pravin Gordhan will have to do more than just keep a lid on spending to reassure investors spooked by the worst mining strikes since the end of apartheid, said economists from Johannesburg to London.
While Gordhan, 63, pledged to freeze spending targets for the first time since 1998, he failed to say in his mid-term budget yesterday how he will address the fiscal burden of an unemployment rate that’s headed for 25 percent. He may also struggle to contain debt levels as slower economic growth curbs tax revenue. Fitch Ratings said today rising debt will push interest payments above the median for its BBB credit rating.
“It is a conservative and entirely predictable budget but it doesn’t offer any bold steps,” George Glynos, an analyst at ETM Analytics in Johannesburg, said in a phone interview yesterday. “He talks about fiscal discipline but I don’t really see that.”
The government is under increased scrutiny as labor unrest adds to pressure on the budget and the ruling African National Congress pledges “radical” shifts at its December leadership conference. Slowing growth and rising social tensions have already sparked the first downgrades since the end of apartheid in 1994, with Moody’s Investors Service and Standard & Poor’s cutting the nation’s ratings in the past month. Fitch will give its review of the country early next year, the company said in a statement.
The government already gives welfare grants to about 16 million people, or a third of the population of 50.6 million.
The rand has slumped 5.9 percent against the dollar since the Moody’s downgrade on Sept. 27, the worst performance of more than 16 major currencies tracked by Bloomberg. It weakened 0.1 percent to 8.7507 a dollar at 12:26 p.m. in Johannesburg.
Strikes that began at Lonmin Plc (LON)’s Marikana mine on Aug. 10 spread to operations owned by Anglo American Platinum Ltd. (AMS), Gold Fields Ltd. (GFI) and AngloGold Ashanti Ltd. (ANG), costing 10.1 billion rand ($1.2 billion) in lost gold and platinum production this year, the National Treasury said yesterday.
Gordhan raised his budget deficit target to 4.8 percent of gross domestic product in the year through March, compared with a February estimate of 4.6 percent after lowering the tax collection goal by about 4 billion rand. The shortfall will reach 4.5 percent next year, up from an earlier forecast of 4 percent, he said.
“The minister is really trying to say that the fiscal ship is not going under and trying to install confidence,” Rian le Roux, chief economist of Old Mutual Investment Group, South Africa’s largest private money manager, said in phone interview from Cape Town. “While he is trying hard, I think the jury is still out.”
Policy risks are rising as the ANC heads to its December leadership summit. In June, President Jacob Zuma said the party had agreed on the need for “more radical policies” to address unemployment, poverty and inequality. The ANC will decide on proposals for new taxes on mining companies, nationalizing some mineral assets or increasing its share in mining projects.
“The fiscal numbers look stable and we believe they have always looked sustainable,” Gordhan said in an interview yesterday in his Cape Town office. “We have demonstrated that whatever the politics are in our environment, we need to keep, and will keep the fiscal ship steady.”
Extracting more revenue from mining companies may further deter investment in the world’s biggest producer of platinum, chrome and manganese. About 20,000 workers have already been fired in the mining industry since an illegal strike started Aug. 10 at Lonmin’s Marikana mine.
Moody’s and S&P should have waited until after the ANC conference to make their assessments, Gordhan said.
The mid-term budget contained evidence of further weakening in the country’s public finances and its failure to meet fiscal targets was eroding one of its key ratings strengths, Fitch said today. Gross debt, which is forecast to peak at 42.7 percent of GDP in the fiscal year through March 2016, is above BBB-rated peers, it said.
“The further delay to fiscal consolidation highlights the challenges to fiscal planning and will put upward pressure on debt levels,” the ratings company said in an e-mail today. “Failure to accelerate growth and make it more sustainably labor intensive would hamper job creation and increase the risk of social strife, with negative implications for the investment climate and credit fundamentals.”
The budget deficit was forecast to reach 4.9 percent of GDP this year, according to the median estimate of six economists surveyed by Bloomberg. While spending will rise 8.5 percent to 1.15 trillion rand in the year through March 2014 and increase 7.9 percent the following year, that’s in line with the government’s targets in February.
“The key for us today is to put this country on a stable footing,” Gordhan said. “Restoring normality is going to be a key goal over the next few months.”
Gordhan lowered his forecast for economic growth this year to 2.5 percent from 2.7 percent, and cut next year’s estimate to 3 percent from 3.6 percent. The economy will probably expand 3.8 percent in 2014, down from an earlier projection of 4.2 percent.
The budget plans “will be viewed positively” by rating companies “although their doubts about the political cycle may well persist,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note to clients.
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