South African Finance Minister Pravin Gordhan plans to restrain spending over the next three years to help restore confidence in Africa’s largest economy in the face of wider budget deficit targets and rating downgrades.
Slower economic growth following a series of mining strikes will curb tax revenue, widening the fiscal gap to 4.8 percent of gross domestic product in the year through March, compared with a February estimate of 4.6 percent, Gordhan said in his mid-term budget released in Cape Town today. The shortfall will reach 4.5 percent next year, up from an earlier forecast of 4 percent.
South Africa didn’t raise three-year spending targets for the first time since 1998, with Gordhan ordering government departments to cut back on wasteful expenditure as rising debt levels put the nation under increased scrutiny from rating companies following the first downgrades since the end of apartheid. That’s limiting the room to stimulate the economy and tackle a 25 percent jobless rate as the global outlook worsens.
“These constraints make it imperative that we do things differently,” Gordhan said. “Government departments will need to live within our means. Spending needs to become more efficient and achieve value for money. Wastage of taxpayers’ money must come to an end.”
Spending will rise 8.5 percent to 1.15 trillion rand ($132 billion) in the year through March 2014 and increase 7.9 percent the following year, in line with the government’s targets in February, the National Treasury said.
The rand extended its gain after Gordhan’s speech, gaining as much as 1.2 percent to 8.682 per dollar today in Johannesburg. The yield on the rand bond due in 2015 rose 1 basis point to 5.48 percent.
“The market clearly likes what it has heard,” Razia Khan, the London-based head of Africa economic research at Standard Chartered Plc, said in a note to clients. “For ratings agencies, the fact that no additional spending is planned beyond that set out as a baseline in the 2012 budget, will be viewed positively, although their doubts about the political cycle may well persist.”
The deficit was forecast to reach 4.9 percent of GDP this year, according to the median estimate of six economists surveyed by Bloomberg.
Revenue, which will probably be 4 billion rand lower than projected at 901 billion rand this year, will increase 9.5 percent and 11 percent for the next two years respectively.
“We will look at expenditure to see if there are areas we can squeeze without impacting growth,” Lungisa Fuzile, director-general of the Treasury, said in an interview in Cape Town. “We may look at certain opportunities where certain taxes can be increased.”
Moody’s Investors Service cut the rating on the government’s debt by one level to Baa1 on Sept. 27, citing increased pressure to boost social spending as job losses mount. Strikes that began at Lonmin Plc’s Marikana mine on Aug. 10 spread to operations owned by Anglo American Platinum Ltd., Gold Fields Ltd. and AngloGold Ashanti Ltd., costing 10.1 billion rand in lost production, according to the Treasury.
Moody’s and Standard & Poor’s, which lowered South Africa’s rating to BBB on Oct. 12, highlighted increased policy risks as the ruling African National Congress pushes for “radical” programs to address poverty and unemployment. About 16 million people, or a third of the population of 50.6 million, receive welfare grants.
“I am not sure whether people who have very little understanding of the South African environment and politics are in a position to anticipate all sort of things,” Gordhan said in an interview today in his Cape Town office. “Why didn’t they wait for the ANC conference to be over, and if something disastrous happened there they can take whatever decision they want.”
South Africa is running bigger deficits than other major 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.
Gross debt in South Africa is set to increase to 42.4 percent of GDP in the year through March 2014 from a February estimate of 42.2 percent and to peak at 42.7 percent in the year after that.
Interest payments on debt are projected to rise 8.9 percent a year over the next three years, reaching 114.8 billion rand in 2015/16, the Treasury said. South Africa will spend 89 billion rand to service debt this fiscal year, more than on policing and schools and second only to welfare payments, its data show.
“We are very close to the upper limits of what we can fund through debt,” Fuzile said.
Investors reacted to the credit rating downgrades by selling rand-denominated assets. The currency has plunged 5.1 percent against the dollar since the Moody’s downgrade, the biggest decline of 16 major currencies tracked by Bloomberg.
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.
“If GDP growth does not match expectations, revenue will fall short of current forecasts, implying the need for policy shifts to achieve the targets in the fiscal framework,” the Treasury said. “An appropriate balance between spending restraint and new revenue initiatives would be necessary, taking into account the need to limit the potential impact on growth, employment and equity. The risk of further sovereign downgrades needs to be considered.”