Aug. 26 (Bloomberg) -- South Africa’s budget-deficit targets are at risk with economic growth expected to slow this year to 1.8 percent, Finance Minister Nhlanhla Nene said.
The projection may be cut from 2.7 percent estimated in February because the “environment has been challenging with strikes and supply-side constraints particularly on the energy” side, Nene, 55, said in an interview yesterday at Bloomberg’s Johannesburg office. The growth outlook may improve going forward, he said.
Marking his third month in the post after being promoted by President Jacob Zuma, Nene gave a detailed assessment of the outlook for Africa’s second-largest economy less than two months before official estimates are due to be published. The growth slowdown is putting the government’s tax-collection targets at risk, making it difficult for Nene to stick to a pledge to limit the budget gap to 4 percent of gross domestic product this year.
The fiscal deficit “is not looking good, that’s why we are looking at improving the efficiency of how we use the resources that we have,” Nene said. The government is confident that “we are able to stick to our fiscal policy stance of sustainable debt levels and infrastructure roll-out.”
The central bank has already downgraded its growth forecast for this year to 1.7 percent, which would be the slowest pace since the 2009 recession, compared with last year’s expansion of 1.9 percent.
The rand rose 0.2 percent to 10.6867 against the dollar as of 5:55 p.m. in Johannesburg, taking its gain in the past six months to 1.2 percent.
South Africa avoided a second recession in five years after a government report today showed GDP grew an annualized 0.6 percent in the second quarter. That’s after a 0.6 percent contraction in the previous three months as a five-month strike shut the world’s largest platinum mines.
“We would expect the outlook to improve, not deteriorate,” in the absence of any shocks, he said. Additional power capacity expected from a new coal-fired plant next year will help to ease energy shortages that have restricted economic expansion, he said.
With expenditure targets in place, Nene said the government will improve revenue collection and limit wasteful spending to help plug the budget shortfall. While not wanting to strain economic growth, tax increases are not out of the question, he said.
“It’s something we should avoid at all costs but at the same time I don’t think it’s something we should rule out should there be a need and should it be warranted and justified,” Nene said. “It’s something that should be carefully considered.”
The government has pledged to reduce the budget deficit to 2.8 percent of GDP in the year through March 2017 and restrict debt to 48.3 percent.
Ratings companies, including Moody’s Investors Service, have warned of further downgrades as growth slows and fiscal targets come under pressure. In June, Standard & Poor’s lowered South Africa’s foreign-currency rating to one level above junk, while Fitch Ratings assigned a negative outlook to the country’s rating.
“The sovereign risk is forever at risk,” Nene said. The fiscal space that South Africa had at the onset of the global financial crisis “has narrowed quite a bit and so the issue of debt sustainability under the current circumstances is always questioned by ratings agencies.”
Moody’s last week also downgraded South Africa’s largest banks following the collapse of African Bank Investments Ltd., a provider of unsecured loans that was rescued by the central bank after its share price plunged 95 percent. The rescue plan included a 10 percent loss for the lender’s senior bondholders.
Moody’s “misread the reason for the government intervention” in African Bank, Nene said. The ratings company “focused a lot on the creditors rather than the broader interest of the financial services” industry, he said.
To contact the editors responsible for this story: Nasreen Seria at email@example.com Vernon Wessels