Protests Erupt as Nene Gives Gloomy South African Budget

  • GDP growth forecast cut to 1.5% this year from 2% previously
  • Students clash with police as they protest higher fees

Finance Minister Nhlanhla Nene painted a gloomy picture for South Africa’s economy in a budget speech disrupted by protesting students and opposition lawmakers calling for more money for education.

Tax revenue in the next three years will be 35 billion rand ($2.6 billion) less than projected in February, pushing up fiscal-deficit targets, Nene said in his mid-term budget on Wednesday in Cape Town. He is struggling to balance support for a sluggish economy while safeguarding the nation’s credit rating as it hovers near junk.

Nene’s speech was delayed by more than 40 minutes as members of the opposition Economic Freedom Fighters called for a postponement and were eventually ejected after chanting “fees must fall” in solidarity with protesting students. Police fired stun grenades and clashed with students after they broke into the National Assembly precinct and held running battles through the streets of the city for hours after the speech.

Nene had little to offer the protesters as economic growth slows. He cut this year’s forecast to 1.5 percent from 2 percent and predicted expansion of 1.7 percent in 2016, down from an earlier estimate of 2.4 percent. He also pledged to stick to his spending ceiling in the face of a rising wage bill and to keep gross debt under 50 percent of gross domestic product.

Nhlanhla Nene
Nhlanhla Nene
Photographer: Waldo Swiegers/Bloomberg

“Without stronger economic growth, the revenue trend will remain muted,” Nene said. “If revenue does not grow, expenditure increases cannot be sustained.’’

Bond yields climbed and the rand weakened on the back of Nene’s assessment. Yields on the government bond due December 2026 rose 13 basis points 8.41 percent as of 6:18 p.m. in Johannesburg. The rand slumped 1.4 percent against the dollar to 13.4929.

“The expectation that the public debt-to-GDP ratio will stabilize over the coming years looks optimistic,” William Jackson, senior emerging-market economist at Capital Economics Ltd. in London, said in a note to clients. “We think that the debt ratio will grind higher and a sovereign-debt downgrade remains a distinct possibility.”

South Africa can’t risk another rating cut, given that interest payments on debt are growing faster than any other expenditure item and make up almost 10 percent of government spending.

Fitch Ratings Ltd. has a negative outlook on South Africa’s BBB assessment, indicating it may cut the nation’s debt from two levels above junk when it publishes its next review in December. Standard & Poor’s and Moody’s Investors Service have stable outlooks on their ratings. Fitch’s assessment is in line with Moody’s and one level above S&P.

The budget shows that the government is committed to fiscal consolidation, while easing the obstacles to faster economic growth, such as the nation’s electricity shortage, Nene said in an interview after the speech.

“It would be unfair for anybody to think that government is not taking the matter seriously of addressing the challenges brought about by the economic environment at home and globally,” he said. The state was also looking at options to help students, Nene said.

The budget-deficit goal for the fiscal year ending March 2016 was improved slightly to 3.8 percent of GDP from 3.9 percent projected in February, largely due to better personal income-tax collection following above-inflation wage increases.

With tax-revenue estimates downgraded in the next three years, the deficit will be higher than projected at 3.3 percent for next year compared with 2.6 percent targeted in February, and 3.2 percent in the following fiscal year, up from 2.5 percent.

Tax Increases

To close the gap, the government is considering raising taxes in the next three years, possibly from increasing value-added taxes and a wealth levy. Any new measures will take into account the weak economic environment, said Ismail Momoniat, a deputy director general in charge of tax at the National Treasury.

“We’ve always been cautious and continue to be cautious,” Momoniat said in an interview in Cape Town.

The economy is hamstrung by power shortages that have curbed mining and manufacturing output at a time when sliding commodity prices force companies, such as Anglo American Platinum Ltd., to scale back investment and cut jobs.

Capacity shortages and maintenance shutdowns by utility Eskom Holdings SOC Ltd. have resulted in 100 days of blackouts this year.

“Electricity supply will remain a binding constraint through 2016, limiting output and dampening business and consumer confidence,” Nene said.

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