South Africa’s budget is focused on achieving sustainable economic growth to reduce poverty rather than satisfying the concerns of credit rating companies, Finance Minister Pravin Gordhan said.
Gordhan yesterday raised his targets for the budget deficit, delaying plans to narrow it to 3 percent of gross domestic product. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have downgraded the nation’s debt since September, concerned by a slowing economy and rising spending pressures. Moody’s and S&P have a negative outlook on the rating, indicating they may lower it further.
“They will keep their negative outlook and we respect their right to do so,” Gordhan said in an interview in Cape Town after his budget speech. “At the same time, we can’t be doing things only for ratings agencies. We have to do things that are right for our country and ensure we build the economic base for this country and build it in a sustainable way.”
The deficit target was raised to 5.2 percent of gross domestic product in the year through March from 4.8 percent estimated in October. The government will cut spending to help bring the shortfall down to 4.6 percent next year, compared with an earlier projection of 4.5 percent, and 3.9 percent in 2014/15. As recently as 2012, Gordhan was targeting a 3 percent gap in two years’ time.
A former head of the nation’s tax agency, Gordhan was forced to cut revenue projections as a slump in export demand from Europe and mine strikes curtailed growth.
South Africa will miss its revenue target by 16.3 billion rand ($1.8 billion) this year and reduce spending by 10.4 billion rand in the next three years, he said. The state will limit expenditure growth to an average of 2.3 percent a year from 2.9 percent previously.
“We do have a revenue squeeze,” the minister said yesterday. “You have to cut your suit according to the cloth available.”
Tax revenue may undershoot targets again next year if the recovery remains weak, Gordhan said at a briefing today in Cape Town. While the government is curbing spending growth, it doesn’t want “austerity measures,” he said in an interview on Johannesburg-based SAfm radio.
Government debt is rising as the government borrows more to finance the fiscal deficit. Net debt is set to climb to 40.3 percent of GDP in the year through March 2016, up from an earlier projection of 39.2 percent, he said.
“He is asking for quite a lot to happen: an acceleration in growth and improvement in revenue collection,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, said in a phone interview yesterday. “This is a bit optimistic.”
The rand fell 0.3 percent against the dollar to 8.8458 as of 8:46 a.m. in Johannesburg. It’s dropped 4.3 percent this year and is the third-worst performer among the 16 major currencies tracked by Bloomberg after the British pound and yen.
The economy “can live” with a weaker rand as long as the impact on import prices, including fuel, is limited, Gordhan said in an interview.
“In recent times, we have found a balance, where you don’t hear public noise about the currency issues and people begin to understand the negative effects on fuel prices,” he said. “We can live with it. The key is still the volatility question.”
Gordhan lowered his forecast for economic growth this year to 2.7 percent from 3 percent. That’s less than half the 7 percent pace the government says is necessary to slash the jobless rate to 14 percent by 2020 from 25 percent currently. Growth is set to quicken to 3.5 percent next year and 3.8 percent in 2015, he said.
“South Africa’s economic outlook is improving, but it requires that we actively pursue a different trajectory if we are to address the challenges ahead,” Gordhan said.