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Budget balancing act

Johannesburg  - Finance Minister Pravin Gordhan looks set to announce another chunky deficit at this week's budget, putting big infrastructure upgrades and the needs of the jobless ahead of bondholders' preference to see cuts in state spending.

Gordhan, who presents his third budget on Wednesday, is expected to outline more infrastructure spending to tackle 24% unemployment, the key challenge facing South Africa.

But a sluggish recovery from a 2009 recession - the first in South Africa since the end of apartheid in 1994 - means he has less by way of tax and customs revenue to play with than he and other economists were projecting three years ago.

The consensus of 16 economists polled by Reuters suggested Gordhan would announce a shortfall of 5.4% of gross domestic product (GDP) for the 2012/13 fiscal year, compared with projections of 4.8% from last year's budget.

"Gordhan has already said that growth will come in well below 3% this year, which means we may see a revision of the deficit - wider rather than narrower," Johannesburg-based consultancy ETM said in a note.

After two years of surplus, the budget slid into deficit in 2009 as Pretoria ramped up spending to counter the effects of a global slowdown.

Since then, unions and leftist elements of the ANC have kept up pressure on Gordhan to maintain spending, in part to redress the economic imbalances left by decades of white-minority rule.

Economists said the deficit was likely to narrow to 4.8% in 2013/14, and 3.8% by March 2015, keeping it around the 4.0% level for at least a year longer than previous forecasts.

The initial plan was to balance the books again within a few years, but sluggish growth and a growing civil servant wage bill, boosted by above-inflation wage settlements, have caused that timeline to slip.

Economic growth is likely to be 3-3.5% over the next three years, well down on pre-financial crisis levels and a fraction of the 7% needed to make any sort of dent in unemployment that stands at 23.9% of the labour force.

In a state of the nation address this month, President Jacob Zuma outlined an infrastructure drive to get South Africa working, with R300bn earmarked for investment in ports and its creaking freight rail network.

However, Gordhan will be under pressure to say where that money is coming from and how he will keep social spending and the state wage bill in check.

In the last three months, Moody's and Fitch downgraded the outlook on South Africa's credit rating and are likely take a dim view if Gordhan points to more delays in fiscal consolidation.

"The rating agencies worry that fiscal slippage - the widening of the fiscal deficit and continued delay in fiscal consolidation - will continue," said Investec economist Annabel Bishop.

"We believe government has the capacity to deliver good news but should this not be the case, be prepared for an eventual country ratings downgrade."

Funding strategy

Instead of spending more, analysts say South Africa should commit to keeping a lid on its overall debt levels, now around 35% of GDP, to attract external investors.

If Gordhan pushes out his forecasts for a balanced budget, bonds are likely to come under pressure, pushing up borrowing costs for both the government and state-owned subsidiaries.

That hammer would fall hardest on logistics firm Transnet and electricity utility Eskom, both of which are expected to tap markets to fund investment spending.

South Africa borrows 90% of its funds domestically, issuing mostly fixed coupon bonds close to R3.0bn in weekly auctions. Primary dealers are obliged to buy from the market at every auction and traders say the supply is sometimes too heavy.

Fraud, corruption

Gordhan would have to confront concerns about fraud and corruption in the provinces and how money should be allocated there.

Kevin Lings, a senior economist at Stanlib, said the minister would have to allay taxpayers' fears around the problems in Limpopo. In January, Gordhan announced that the province faced a potential shortfall of R2bn at the end of the financial year.

Limpopo had accumulated unauthorised expenditure which had grown from R1.5bn in 2009 to R2.7bn 2011, he said at the time.

Lings said: "This week, the minister would have to make sure taxpayers are assured that a situation like this would never be repeated again. There will be a lot of focus on this matter in the budget speech."

Tony Twine, a senior economist at Econometrix, said Gordhan is going to demand that wasteful spending be cut in government.

"He is also going to demand that spending on fraudulent and corrupt activities is put to a halt," Twine said.

More details on the implementation and timelines for the national health insurance (NHI) are also hoped for.  

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