Prepare for growth adjustments - economist

Cape Town - National Treasury will likely lower its growth forecasts on the back of lower commodity prices, Kim Silberman, an economist at Standard Bank’s SBG Securities (SBGS), said on Tuesday.

According to Silberman, Finance Minister Nhlanhla Nene is likely to announce a lower growth forecast during his mini budget speech in Parliament on Wednesday.

Treasury will likely lower its real gross domestic product (GDP) growth forecasts from 2.0%, 2.6% and 3.0% for 2015/16, 2016/2017 and 2017/18 financial years respectively, to around 1.5%, 2.1% and 2.9%, said Silberman.

Nene’s February budget stated that, in the event of a 10% decline in South Africa’s export commodity prices, real GDP growth would fall to 1.5% in 2015 and 2.1% in 2016.
 
“Although several of SA’s commodity exports have fallen more than 10% since February, we suspect these GDP growth estimates may be a good indication of the revised GDP growth rates, which will appear in the … mini budget this week, and that growth in 2017/18 will be revised to below 3%,” said Silberman.

SBGS believes the budget deficit could widen to 4.1% in 2015/16, instead of the 3.9% estimated in the February budget.

“Gross debt to GDP could widen to over 50% of GDP by 2017/18 and, importantly, may not flatten out over the budget period,” said Silberman. “The plateauing of debt to GDP was a key factor in Moody’s argument to maintain SA’s investment grade rating.”
 
Moody’s kept the country’s credit rating at Baa2 this year and said it did not expect to lower that rating this year.

“If we assume GDP growth of 1.3% in 2015/16, we estimate the budget deficit would widen to 4.1% of GDP and total gross loan debt could rise to 47.9% versus Treasury’s estimates of 3.9% and 47.3%,” said Silberman.

“We have previously noted that the elasticity of revenue to GDP could also disappoint as a result of inflation being overstated. Both the Consumer Price Index (CPI) and Producer Price Inflation (PPI) have fallen significantly in 2015, with CPI averaging 4.7% since the start of the budget year and PPI averaging 3.4%.”

Treasury has assumed inflation of 5.9% for 2015/16.

“Should GDP growth and the elasticity of revenue to GDP disappoint to the downside, this could see the 2015/16 budget deficit widen to as much as 4.5% of GDP, while gross loan debt to GDP could increase to 48.3% in the current fiscal year,” said Silberman.