South African Finance Minister Pravin Gordhan may target wider fiscal deficits over the next three years that will test the government’s credibility in the face of credit rating downgrades and slowing growth.
Gordhan, 63, will push his deficit goal in the mid-term budget tomorrow to 4.9 percent of gross domestic product in the year through March 2013, compared with a February estimate of 4.6 percent, according to the median estimate of six economists surveyed by Bloomberg.
The worst mining strikes since the end of apartheid are curbing growth in Africa’s largest economy at a time when Europe’s debt crisis slashes demand for exports, crimping government revenue. Investors are looking to Gordhan to restore confidence and provide stability as policy risks increase before the ruling African National Congress’ leadership contest in December.
“South Africa is caught in a very negative place, with downside risks to growth dominating,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in a telephone interview yesterday. “What the Treasury will have to do, and its work will be cut out for it, will be to support its current rating, win the confidence of the ratings agencies once again, by saying ‘We are not departing from the path of fiscal conservatism.’”
Gordhan may increase his target for the deficit next year to 4.4 percent from 4 percent and forecast a 3.4 percent gap in the year after that, according to the Bloomberg survey. As recently as 2008, the government was posting surpluses.
South Africa is running bigger deficits than other emerging markets and its action is counter to fiscal austerity measures in European nations including Greece and Spain aimed at trimming fiscal deficits to avoid debt defaults. Brazil is targeting a public-sector gap of 1.6 percent of GDP for 2012, while Turkey is projecting 2.3 percent for its central government shortfall.
Gordhan will probably cut this year’s economic growth estimate to 2.3 percent from 2.7 percent and project 2.9 percent expansion in 2013, according to median estimate of 12 economists surveyed by Bloomberg. He is scheduled to announce the budget details in a speech to lawmakers in Cape Town at 2 p.m.
Moody’s Investors Service cut the nation’s credit rating one level to Baa1, the third-lowest investment level grade, on Sept. 27, citing the government’s inability to manage the political and economic crisis engulfing the country. Standard & Poor’s lowered its rating on Oct. 12 to BBB, the same as Mexico, Russia and Brazil.
The rand dropped 6.2 percent against the dollar since the Moody’s downgrade, the worst-performer of more than 160 currencies tracked by Bloomberg. The yield on the rand bond due in 2021 has risen 17 basis points to 6.62 percent in the period. The rand rose 0.3 percent to 8.7436 at 3:11 p.m. in Johannesburg today.
Strikes that began at Lonmin Plc’s Marikana mine on Aug. 10 spread to mines owned by Anglo American Platinum Ltd. and Gold Fields Ltd., putting pressure on the government to boost social spending in an economy with a 25 percent jobless rate, Moody’s and S&P said. About 16 million people, or a third of the population of 50.6 million, receive welfare grants.
Gordhan “will be walking a fiscal tightrope, balancing the need for additional stimulus in a struggling local economy against the need to curb” the budget deficit, Johan Botha, an economist at Johannesburg-based Standard Bank Group Ltd., Africa’s biggest lender, said in a note to clients yesterday.
In the first five months of the fiscal year, the government collected 291.3 billion rand ($33 billion), or 36 percent of its total budgeted revenue, according to the National Treasury. While that’s almost 30 billion rand more than received in the same period of 2011, a slump in mining and manufacturing may put a brake on tax receipts.
“The losses in the mining sector are going to influence their revenue estimates,” Madalet Sessions, an economist at BoE Private Clients in Cape Town, said in a phone interview. “They had quite robust revenue estimates which they might cut back down.”
The strikes are having a “significant” impact on the economy, with 4.5 billion rand in platinum and gold production deferred, President Jacob Zuma said on Oct. 11. South Africa is the world’s largest producer of platinum, chrome and manganese.
The budget deficit targets are increasing at a time when rising imports and a drop in exports fuel the widest current-account gap in about four years, adding to investors’ concerns, said Standard Chartered’s Khan said.
“Even with pretty dismal growth all around, South Africa is still seeing the kind of import growth and weakness in terms of its exports that is driving its current account wider,” Khan said. “The Treasury will really have its work cut out for it in terms of not having any leeway for significant fiscal expansion because sentiment is going to be driven by the twin deficit considerations.”
The shortfall on the current account, the broadest measure of trade in goods and services, reached 6.4 percent of GDP in the second quarter. South Africa relies on foreign investment in stocks and bonds to fund the deficit, inflows that have fluctuated this year as the global outlook worsened.
Investors are also wary of possible policy shifts at the ANC’s December conference, in which Zuma is seeking a second five-year term as party leader. The ANC may decide whether it will back new taxes for the mining industry as it faces pressure from its Youth League to nationalize assets. At a June policy conference, Zuma said the ANC will push for “more radical policies” to combat joblessness and poverty.
“We are shooting ourselves in the foot because we have such poor leadership in the country,” Ian Scott, a fixed-income portfolio manager at Stanlib Asset Management in Johannesburg, said in a telephone interview.