politics & economy

South Africa deficit target at risk for Pravin Gordhan as growth stumbles

Tuesday, 21 Feb 2012

The government will probably forecast a shortfall of 5.4 percent of gross domestic product in the year through March 2013 in the budget tomorrow, according to the median estimate of 10 economists surveyed by Bloomberg. Gordhan estimated a deficit of 5.2 percent in October.

South Africa is moving further away from a budget surplus of four years ago as Europe heads into recession, slowing growth in Africa’s biggest economy to less than 3 percent. That’s crimping tax earnings at the same time the government ramps up spending on rail and ports projects to boost exports. Fitch Ratings and Moody’s Investors Service have cut the outlook on South Africa’s credit rating to negative from stable in the past three months.

"There is certainly a concern," Leon Myburgh, Citigroup Inc.’s sub-Saharan Africa strategist, said in a phone interview from Johannesburg. "We have seen a constant delay in bringing the deficit down."

Investors were more pessimistic about South African debt than other emerging markets in the past six months. The cost to protect the country’s debt against non-payment for five years increased 43 basis points, or 0.43 percentage point, to 179 over the period, according to data provider CMA. Mexico swaps dropped 19, while Brazil declined 27 and Russia gained 8 during the same period.
Job Targets

President Jacob Zuma is under pressure from his labor union allies and members of the African National Congress to boost jobs as he bids for a second term to lead the ANC in a December ruling party election. Zuma has pledged to create 5 million jobs by 2020 in order to cut the unemployment rate to 14 percent. The jobless rate of 23.9 percent is the highest of 61 nations tracked by Bloomberg.

Gordhan is due to begin his budget speech at 2 p.m. in Parliament in Cape Town. In the mid-term statement, he raised the estimated deficit for 2012-13 from 4.8 percent.

Zuma on Feb. 9 announced "massive" spending on rail and ports infrastructure projects to revitalize the economy, adding to state debt as the government borrows more. South African Airways and South African National Roads Agency Ltd. are seeking additional funds from the government to pay debts and fund expansion plans.
Budget Slippage

The risk is that the government takes on some of these costs, adding to spending and the deficit, said Andre Roux, head of fixed income at Investec Asset Management, South Africa’s biggest independent fund manager.

"My worry is that he has said for several years he is going to bring down the deficit, Roux said. ‘‘There are so many promises out there that if he allows slippage in this budget’’ that will be a concern for the market, he said.

Gordhan will probably cut his forecast for economic growth this year to below 3 percent, less than half the 7 percent expansion the government says is needed to meet its jobs target. The economy expanded an annualized 1.4 percent in the third quarter, close to a two-year low, as Zuma’s 39-billion rand stimulus plan last year did little to spur the economy and mining and manufacturing slumped.

Plans for a compulsory health insurance program over the next 10 years may require the government to find savings to keep the deficit in check. Gordhan has pledged to narrow the fiscal deficit to 3.3 percent within three years and achieve a balanced budget over time.
Ratings Outlook Cut

Fitch lowered the outlook on South Africa’s BBB+ rating to negative from stable last month as government debt and unemployment increased. Moody’s cut its outlook in November, citing ‘‘heightened political risk."

"It is clear that over the last 18 months there has been a more relaxed view of a long-run deficit," Peter Attard Montalto, an economist at Nomura Holdings Inc. in London, said in a phone interview. If economic growth slows to 2.3 percent this year, the deficit may widen to 6 percent of GDP, he said.

Transnet SOC Ltd., the state-owned ports and freight-rail operator, will spend 300 billion rand over seven years to expand capacity of iron ore, coal and manganese rail lines, Zuma said this month. South African Airways is seeking 6 billion rand for expansion, the Public Enterprises Ministry said on Feb. 16, while Limpopo’s provincial government asked the government for an extra 1 billion rand to pay salaries.

Gordhan may be forced to introduce new taxes on mining or other industries to narrow the deficit, Colen Garrow, an economist at Brait SA in Johannesburg, said.

"I don’t see any other way out of it but to announce an increase in taxation," Garrow said. The ratings companies are "a little edgy about the deterioration of the fiscal side."

The currency has gained 5.3 percent this year, paring an 18 percent decline last year, the most of 16 major currencies tracked by Bloomberg. It weakened 0.1 percent to 7.6836 against the dollar by 10 a.m. in Johannesburg.

Credits: Ahmed A. Namatalla/Bloomberg