Oct. 23 (Bloomberg) -- South African Finance Minister Pravin Gordhan risks alienating the ruling party’s labor union allies ahead of next year’s elections as he seeks to rein in spending to avoid a possible credit-rating downgrade.
Gordhan will present revised economic growth and fiscal deficit targets when he delivers his mid-term budget speech at 2 p.m. local time in Parliament in Cape Town. A series of strikes at mines and factories have dimmed hopes of meeting targets set on Feb. 27 for 2.7 percent expansion this year and a 4.6 percent budget gap in the year through March 2014.
Signs of a slip in fiscal discipline may raise the risk of further credit-ratings downgrades from Standard & Poor’s and Moody’s Investors Service, pushing up debt costs. That gives Gordhan, 64, little room to ease spending limits as labor unions push the ruling African National Congress to do more to tackle poverty in the continent’s largest economy.
“Gordhan is more likely to try and address the negative sentiments about South Africa than dole out handouts in advance of the election,” Daniel Silke, a political analyst and author of “Tracking the Future: Top trends that will shape South Africa and the World,” said in a phone interview from Cape Town yesterday. “He’s likely to try and send out a message that the country is responsible, that it needs to rein in excess expenditure.”
The budget-deficit target in the year through March will probably be raised to 5 percent, according to the median estimate of 16 economists surveyed by Bloomberg, while economic growth projections will be trimmed to 2.1 percent, a poll of 29 economists shows.
Moody’s cut South Africa’s credit rating last year to Baa1, the third-lowest investment grade level, followed by S&P and Fitch. Moody’s and S&P hold a negative outlook on South African debt, indicating a greater chance the rating will be downgraded than raised.
The 100-year-old ANC has ruled Africa’s largest economy since the first multi-racial vote in 1994, in alliance with the 2.2-million-member Congress of South African Trade Unions and the South African Communist Party.
With elections due to take place by July next year, the unions have become more strident in their calls for the government to focus less on attracting investors and do more to create jobs and improve access to services, such as housing and electricity.
“We want to see some clear measures that money will be made available for industrialization, infrastructure and above all jobs,” Cosatu spokesman Patrick Craven said in a mobile phone interview yesterday. “Gordhan shouldn’t allow these rating agencies to dictate what our policies should be. They represent international big business, not the people of South Africa.”
Relations between the ANC and Cosatu have already been frayed by the government’s decision to toll highways around Johannesburg and subsidize new entrants to the jobs market. The union federation also opposes the government’s National Development Plan, which calls for a review of labor laws to encourage hiring and create 11 million new jobs by 2030.
The rand has slumped 13 percent against the dollar this year, the worst performance of 16 major currencies monitored by Bloomberg, and was trading at 9.7385 per dollar by 5:45 p.m. yesterday in Johannesburg.
The South African Chamber of Commerce and Industry, the nation’s biggest business organization, said Gordhan’s priorities should be attracting and sustaining foreign investor interest and reducing spending on civil servant wages.
“The government needs to borrow funds as cheaply as possible in the short term to expand our infrastructure network and accommodate the growing public sector wage bill,” Neren Rau, the chamber’s chief executive, said in an e-mailed statement yesterday. “The National Treasury must also present a credible plan on how government debt will be reduced over time in order to improve our credit rating and facilitate easier access to finance for the private sector.”
Wages for government workers have increased an average 14 percent annually in the five years through 2012, more than double the inflation rate of 6.3 percent in the period. The government reached a three-year pay deal with its 1.3 million employees in August 2012, giving them a 7 percent raise for the year through March, and 1 percentage point above inflation in the next two fiscal years.
President Jacob Zuma, who has spent the past few weeks opening new roads, bridges and rail links to showcase his administration’s achievements, said the finance minister would strike a balance between competing interests.
“Minister Gordhan will deliver on our behalf a budget that the country needs at this point, to stimulate growth under difficult conditions while also encouraging fiscal discipline,” Zuma said in a speech at De Beers’ diamond mine in the northern Limpopo province yesterday. “It has been drawn up under difficult economic conditions.”
Gordhan has limited scope to act as the global economy remains weak and labor relations deteriorate, said Dawie Roodt, chief economist at Efficient Group in Pretoria.
“The real economic problems, like labor problems and global turmoil, are out of Gordhan’s hands,” Roodt said by phone from Cape Town yesterday. “Economic growth is slow, which means less tax income and distorted debt and deficit ratios.”
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