South Africa Budget Woos Voters While Easing Investor FearsRene Vollgraaff and Mike Cohen
South African Finance Minister Pravin Gordhan aimed to appease investors and voters ahead of May 7 elections as he stuck to spending limits to reduce his budget deficit targets while trimming personal tax.
A weaker currency boosted exporters’ income, enabling the National Treasury to collect 4 billion rand ($369 million) more than it expected in October and reduce the fiscal gap to 4 percent of gross domestic product in the year through March. Gordhan was able to provide tax relief of 9.3 billion rand for next year, mainly by adjusting tax brackets for inflation, even as he lowered the economic growth outlook for 2014.
“He probably did his best in trying circumstances to keep the peace, but it’s going to be very tricky in the coming years,” Kay Walsh, an economist at Deloitte LLP, said by phone from Cape Town yesterday. “From a rating agency perspective, I think he definitely helped to reassure them and investors that they are not about to change the debt trajectory too drastically, that it is sustainable and that they are going to be quite firm on curbing expenditure.”
Opinion polls show support for the African National Congress, in power since the nation’s first multiracial elections in 1994, has slipped amid rising discontent over a 24 percent unemployment rate and a lack of housing and sanitation services. Gordhan, 64, used his last budget of President Jacob Zuma’s current administration to highlight the government’s success in steering the economy out of recession five years ago.
“We have a good story to tell,” Gordhan said in an interview in Cape Town yesterday with Bloomberg TV Africa. “We are sustaining our fiscal numbers, we are sustaining our expenditure ceilings, we are trying to get better quality of outputs for the money that we actually spend. We’re keeping our balance between social expenditure and economic support.”
Standard & Poor’s and Moody’s Investors Service have kept South Africa’s credit rating on a negative outlook since downgrading it in 2012.
The rating “remains on a negative outlook as we stand right now,” Ravi Bhatia, S&P’s director of sovereign ratings, said by phone from London yesterday. “I don’t think we’ve seen any major surprises, either on the upside or on the downside, in the budget. I do not see any major revenue measures in the budget that would give us comfort that the fiscal deficits are going down faster and the debt metrics are improving faster.”
The deficit will remain at 4 percent of GDP in the year through March 2015, before narrowing to 3.6 percent and 2.8 percent in the following two years, Gordhan said in his budget speech. Gross government debt will probably increase to 48.3 percent of GDP in three year’s time from 45.8 percent this year.
Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on more than 300 upgrades, downgrades and outlook changes since 1974 and through December 2012.
The rand fell as much as 1.2 percent against the dollar yesterday after Gordhan lowered this year’s economic growth forecast to 2.7 percent from 3 percent. It gained 0.2 percent today to trade at 10.7952 per dollar as of 10:53 a.m. in Johannesburg.
The Treasury has demonstrated its “commitment to expenditure control,” Bhatia said. “They are doing what they can, but really at the heart of it, is the poor growth story which is not helping the headline figure, and that’s one of our concerns.”
Gordhan kept growth projections for the next two years unchanged at 3.2 percent and 3.5 percent. The economy expanded 1.9 percent last year as strikes in mining and manufacturing and a slump in global demand curbed exports.
Government revenue benefited from higher corporate and individual tax receipts in the current fiscal year as a weaker rand boosted profits of exporters and workers secured above-inflation pay increases, the Treasury said. Those factors may not persist, it said.
The ANC will definitely win elections in three month’s time and the budget will be carried forward by the next administration, Gordhan told reporters yesterday, declining to comment on whether he will stay on for a second term after the poll.
“I am underwhelmed by the budget speech,” Jac Laubscher, group economist of Cape Town-based Sanlam Ltd., the biggest South African-based life insurer, said in e-mailed comments. “As is to be expected in an election year, it dwells excessively on past achievements. Except for a few marginal items, it offers nothing new.”