Gordhan Budget Looks to Steer South Africa From Junk Ratingby
Debt to increase and deficit closure to slow as growth weakens
Higher taxes, spending cuts may help to narrow budget gap
South African Finance Minister Pravin Gordhan faces a tough challenge: restoring confidence in economic policy, keeping the nation from losing its investment-grade credit rating and staving off recession.
In his first budget speech on Wednesday since being reinstalled to the job in December, Gordhan, 66, must contend with dwindling revenue as commodity prices plunge, the worst drought in more than a century and slowing economic growth.
With debt rising and Standard & Poor’s threatening to cut the nation’s credit rating from BBB-, the lowest investment grade, Gordhan has little room to maneuver. At the same time, businesses and investors are looking to him to restore policy confidence after President Jacob Zuma damaged sentiment in December when he replaced his finance minister at the time, Nhlanhla Nene, with a little-known lawmaker.
Zuma backtracked on his decision four days later and reappointed Gordhan to a post he had held between 2009 and 2014.
“It will be a market-friendly budget, but the minister is very limited in terms of spending,” Thabi Leoka, an economic strategist at Argon Asset Management, said by phone from Johannesburg. “He will want to articulate measures that the government is hoping to implement in the hope of trying to keep us from getting downgraded, but we need to see implementation.”
The rand has gained 2.5 percent against the dollar since the beginning of the year to trade at 15.0963 as of 2:35 p.m. in Johannesburg on Tuesday.
Here’s what may be in store for the budget, the seventh under Zuma’s presidency:
Nene had estimated in October that the budget deficit in the year through March 2017 will narrow to 3.3 percent of gross domestic product from a projected 3.8 percent this year. Reducing that shortfall will probably take longer, with the deficit likely to reach 3.5 percent in 2016/17, according to the median of 21 economists’ forecasts compiled by Bloomberg.
Gross debt is set to exceed 50 percent of GDP and could surge as high a 55 percent in 2018/19 without “structural improvements in revenue,” according to Morgan Stanley economist Andrea Masia. The government will need to issue an extra 23 billion rand ($1.5 billion) in debt, including 8 billion rand of short-term securities such as Treasury bills, to fund the budget shortfall over the next three years, Masia said in a note.
Nene raised personal income taxes last year for the first time in two decades and Gordhan will probably take similar steps to help curb the budget shortfall. He has already received the backing of business leaders for higher taxes following recent meetings with them. The government gradually cut the corporate tax rate to 28 percent from 48 percent in 1993, while the value-added tax rate has been at 14 percent for more than two decades.
A 1 percentage-point increase in VAT could raise a much as 15 billion rand a year in additional income, according to BNP Paribas Securities South Africa. That may prove politically unpopular in a year in which the ruling party is seeking to win votes in local council elections, said Johann Els, an economist at Cape Town-based Old Mutual Investment Group.
Gordhan may reduce spending targets over the next three years by forcing government departments to cut waste, such as travel and entertainment costs, according to Barclays Group Africa Ltd.’s investment banking unit. Government expenditure has grown on average 8.9 percent annually in the past three years to reach about 1.25 trillion rand this fiscal year and was projected to increase 5.3 percent next year.
The International Monetary Fund, World Bank and South African Reserve Bank have all cut their 2016 economic growth forecasts to less than 1 percent, a key concern for credit-rating companies. Gordhan will probably reduce the Treasury’s projection of 1.7 percent growth for this year and 2.6 percent for 2017 published in October.
“Penciling in growth above 1 percent this year would raise serious questions over the credibility of the whole document, similarly for growth rates above 2 percent for next year,” Peter Attard Montalto, an economist at Nomura Plc in London, said in an e-mailed note to clients.
Gordhan will need to find extra money to fund the government’s pledge of no fee increases for university students and assist farmers whose crops and livestock are threatened by drought. That task is made more difficult by the government’s awarding of above-inflation wage increases to civil servants over the next three years.
The budget probably won’t have much detail on big expenditure projects like the 9,600-megawatt nuclear program or the National Health Insurance plan, according to BNP’s South Africa economist, Jeffrey Schultz. Gordhan may also give more information about possible “non-strategic” state assets that can be sold to raise cash for the government, according to Nedbank Ltd.