Slow growth to test Gordhan
Forecasts likely to decline
SOUTH Africa’s lumbering economic growth is expected to be Finance Minister Pravin Gordhan’s main Achilles heel when he presents his mediumterm budget policy statement on Wednesday, ahead of a crucial debt ratings review.
The Treasury’s growth forecast of 0.9 percent this year is out of date and Gordhan will have to revise it down in line with that of the Reserve Bank’s forecast of 0.4 percent or even that of the International Monetary Fund of 0.1 percent.
A Reuters poll last week of 15 economists suggested growth is expected to remain weak this year, at 0.3 percent.
The weaker-than-expected gross domestic product (GDP) growth outcome for this year is likely to see the headline budget deficit come in at about 3.4 percent of GDP instead of the 3.2 percent forecast in the budget.
Deficit target
The Reuters poll suggests Gordhan is expected to target a budget deficit of 3.4 percent of GDP for the year ending March 2017 in his mini budget.
A very important consideration for the ratings agencies will be whether the expenditure ceiling is adhered to.
Tax collection for the fiscal year to date is running behind target due to the weaker-than-expected economy.
With the stronger rand than in the budget, gross domestic debt should fall back to just under 50 percent of GDP.
Relative to South Africa’s peer group of emerging markets, government debt levels are not exceptionally high. Compared with most developed nations, it is low.
Economists polled by Reuters highlighted the higher debt servicing costs for South African credit in the event of a downgrade.
According to Dave Mohr and Izak Odendaal, investment strategists at Old Mutual Multi-Managers: “The problem is that it increased rapidly since 2009, as borrowing had to make up for the difference between spending and tax revenue. Interest payments are now the fastest growing item in the budget, and if the debt ratio is not stabilised, they will increasingly crowd out other spending items. Government expects to pay a massive R147 billion on interest payments in the current fiscal year.”
Government expects to pay a massive R147 billion on interest payments in this fiscal year.
They said to stabilise the debt ratio, the government needed to reduce its deficit, something which had happened only very gradually, partly because the Treasury realised that reducing it too quickly, through tax hikes and spending cuts, risked tipping the economy into recession.
The mini budget comes ahead of crucial debt rating reviews later this year and amid a probe of Gordhan, who is facing charges of fraud when he previously ran the SA Revenue Service, accusations he has denied and has said are politically motivated.
A Reuters poll in August showed the country’s credit rating is set to be cut to junk status by at least S&P Global out of the three major agencies, with the investigation into Gordhan seen to be fuelling speculation.
Economists highlighted the higher debt servicing costs for South African credit in the event of a downgrade.