Johannesburg - South Africa's Treasury will likely follow a global trend next week in announcing a swelling budget deficit and sharply lower growth, just as investors grow wary of a possible shift in policy to the left.
The National Treasury has little room to manoeuvre with Africa's biggest economy mired in a recession that has slashed tax revenue and, with spending remaining relatively high, the budget is seen deep in the red for the next three years.
Investors, however, will watch for signs in the medium term budget on whether the fiscal stimulus signals a permanent shift away from previous conservative, market-friendly policies.
The rand weakened this week after President Jacob Zuma made changes to the structure of cabinet committees, seemingly sidelining respected former finance minister Trevor Manuel, who now heads up a planning commission.
A senior policy maker Joel Netshitenzhe, seen as one of the architects of past policy, resigned.
Appointed in May, Pravin Gordhan has had a difficult first few months as finance minister and will unveil the Medium Term Budget Policy Statement on October 27 amid the country's first recession in nearly two decades.
The government has estimated taxes will come in at least R70bn below February's forecast.
Borrowing has already risen to plug the gap and Gordhan is expected to confirm this trend.
The statement, four months ahead of the annual budget, gives three-year spending plans, updates to economic forecasts and signals policy changes.
"It is probably the most important medium term budget to date, as the sustainability of the prudent fiscal policy that South Africa has followed for the past 10 years is in question for the first time," Sanlam group economist Jac Laubscher said.
Bigger deficit
Conservative budgets over more than a decade, aided by a robust local and global economy, saw budget surpluses and praise from credit agencies.
A Reuters poll of 12 economists this week put the fiscal shortfall at 7.5% of GDP this financial year, to March 2010, up from 1.2% a year ago and almost double the 3.8 percent anticipated in February. This should translate to a shortfall of about R180bn.
The deficit will likely stay big for a few years, with more spending, and more borrowing, needed until the economy is safely through its slump.
"The consequences of this year's fiscal catastrophe will be with us for some time to come," Laubscher said, suggesting the government will have to cut back on some of its spending plans.
"Caution will have to be the operative word and risky initiatives, the outcome of which cannot be predicted with reasonable certainty, should be avoided."
The poll put the deficit at 5.4% of GDP in 2010/11, with the public sector borrowing requirement at 11.3% of GDP this year.
"Overall investors are looking for a credible plan to bring the budget back towards a sustainable level over the medium term," Nomura International emerging markets economist Peter Attard Montalto said.
"I don't think there is any political will to take action this year on the revenue or expenditure side so it's very much about next year and beyond."
Taxes may have to rise in the next two financial years to help narrow the gap, although this was unlikely in the coming year due to the precarious state of household finances, already facing big power price hikes.
"I think we are going to escape higher taxes (this time) but he could use the format to flag higher taxes going ahead," Colen Garrow from financial service group Brait said.
"There has got to be some pull back in the fiscal numbers."
Gordhan may also signal more debate around inflation targeting, but again, there is unlikely to be a decision yet on whether to change the framework or the actual band.
Currently, the central bank is tasked with targeting consumer inflation at between 3% to 6%, a policy that has provoked fierce criticism from the ruling ANC's trade union allies that argue it has led to overly tight monetary policy.
Massive power price increases - utility Eskom wants at least 45% a year for the next three years to help pay for more capacity - and above-inflation wage increases may make it increasingly difficult for the Reserve Bank to meet the target.
Garrow said there was not expected to be any changes made to exchange controls, given that the restrictions on investment abroad were seen as one of the key factors in protecting South African banks through the global financial crisis.
The Treasury will also give updated economic forecasts, with the 1.2% growth prediction made in February unattainable - the economy has been in recession all year.
Gordhan said at a conference on Thursday the outcome for this year was closer to minus 2 percent, in line with analyst forecasts.
- Reuters