South Africa Looks for Extra $1.8 Billion of Spending Cuts

  • Reductions are in addition to those announced in February
  • Finance minister to provide more information in Feb. 21 budget

Why Traders Are So Relieved About the Rand

South Africa will look to cut spending by a further 25 billion rand ($1.8 billion) over the next three years as the nation tries to avert another downgrade of its rand debt to junk.

President Jacob Zuma on Monday asked the Presidential Fiscal Committee, led by Finance Minister Malusi Gigaba, to finalize the plans for expenditure reductions for the 2019 fiscal year that starts in April. This is in addition to the 26 billion rand of cuts announced in the February budget for this year and next.

He also wants the committee to find ways to improve revenue by an extra 15 billion rand in fiscal 2019, which may include tax measures. The February consolidation plan provided for 13 billion rand of revenue increases in fiscal 2018 and none in the following year.

S&P Global Ratings downgraded Africa’s most industrialized economy’s rand-denominated debt to junk on Friday, saying the nation’s economic outlook and public finances had deteriorated.

South Africa will have a revenue shortfall of 50.8 billion rand in the 2018 fiscal year that ends in March, Gigaba said in his Oct. 25 medium-term budget. The National Treasury sees public debt exceeding 60 percent of gross domestic product by 2022. Gigaba is expected to make further announcements on the expenditure cuts and revenue increases in the Feb. 21 budget speech.

Moody’s Investors Service kept South Africa’s ratings on its lowest investment grade on Nov. 24 but placed them on review for possible downgrade within 90 days.

Should Moody’s cut, this raises the risk that South Africa’s rand debt, which comprises about 90 percent of its outstanding liabilities -- may fall out of gauges including Citigroup Inc.’s World Government Bond Index. This could spark outflows of as much as 100 billion rand, Citigroup said last week.

Fitch Ratings affirmed the country’s debt scores at its highest non-investment grade with a stable outlook on Nov. 23.

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