Johannesburg - The rand fell to a 3-week low against the dollar on Monday on worries that Finance Minister Pravin Gordhan will announce a bigger fiscal deficit in his maiden medium-term budget policy statement on Tuesday.
The budget will be closely watched as investors grow increasingly concerned about a possible economic policy shift to the left.
Appointed in May, Gordhan is serving under President Jacob Zuma who rose to the highest post in the country with the strong support of communists and trade union allies of the ruling ANC who are pushing for leftist policies.
Changes in cabinet committees last week, which sidelined respected former Finance Minister Trevor Manuel, and the resignation of a policymaker who was seen as one of the architects of market-friendly policies worried investors.
The rand fell more than 1.2% on the day to 7.5649 against the dollar, its weakest level since October 5. At 17:40, it stood at 7.55 compared with Friday's close of 7.47.
"It's all the nervousness ahead of the budget announcement. There's lots of talk the deficit is going to be 7.5% of GDP. People are lightening up on their South African exposure," said Ion de Vleeschauwer, chief dealer at Bidvest Bank.
"Any shift towards the left and any massive announcement will put pressure on the rand," de Vleeschauwer said,
Gordhan faces a massive shortfall in tax revenues, likely to double the estimated fiscal deficit.
"The big issue of course will be on the revenue side," said
economist Dawie Roodt of the Efficient Group.
"Revenues are currently under severe pressure because of the
economic slowdown and I won't be surprised if we see about R70bn,
maybe R80bn or R90bn under budgeted estimates."
South Africa's economic outlook has worsened considerably since
the February budget when growth for the year was expected to be 1.2%.
"The biggest challenge is the fact that the economy is not
growing fast enough for government to generate the tax revenues to finance development," said Tony Twine, an economist with
Econometrix.
Ahead of South Africa's elections in April, which returned the
ruling party to government, Manuel poured billions into public
infrastructure investment and social spending to boost long-term
growth.
But, eight months later, the recession has been worse than
imagined with the economy estimated to contract at 2% in
2009, and a budget deficit pinned at 3.9% likely to balloon nearer to seven percent.
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Jac Laubscher, Sanlam group economist, says this is probably the
most important mid-term budget to date, as it questions the
sustainability of South Africa's prudent fiscal policy for the
first time.
"The challenge over the next few years will be quite
different, namely to curb spending until the economy, and therefore tax collection, has recovered sufficiently."
The International Monetary Fund forecasts growth of 3.3%
over the next three years.
Tax hikes?
Roodt said low state debt in recent years meant "we can afford
to run quite a large fiscal deficit for quite some time" but there won't always be room to do this.
The billions of rand in tax relief for individuals Manuel has
given over the years is likely to grind to a halt in the next few years and possibly reverse as the economy recovers.
The mid-term budget comes amid mounting pressure on the new
government, with violent service delivery protests on the rise, a widening poverty gap and 724 000 jobs lost since last year.
The beleaguered power giant Eskom is angling for a 45%
annual tariff increase, after two increases totalling 59%
since last year, as it struggles to finance two new power stations to meet increasing energy demands.
While the powerful left pushes for a greater role for the state
in the economy, Laubscher warns they will have to think again.
"In fact, the squeeze in which the government finances is going
to find itself necessitates a greater role for the private sector, inter alia in the development of infrastructure through
public-private partnerships."
He says new initiatives such as a contentious proposed national
health service and national social security system are risky in the current vulnerable economy.
"Caution will have to be the operative word and risky
initiatives, the outcome of which cannot be predicted with
reasonable certainty, should be avoided."
- Reuters and Sapa