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SA needs to limit social spending

Oct 23 2012 16:20 Reuters

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Johannesburg - Strikes and violence at mines have piled pressure on the government to boost social spending in its 3-year budget plan this week but handouts may be limited by the need to keep bond investors on board.

The violence has highlighted chronic social divides nearly two decades after the end of white-minority rule, prompting President Jacob Zuma to call on Wednesday for a faster roll out of a government infrastructure plan to address the tensions.

Zuma, who faces an internal African National Congress (ANC) leadership election in December, said workers' frustrations had become clearer during the protests.

But Gordhan is not expected to boost spending significantly to tackle social tensions, though he will sympathise and express concern about the strikes in his Budget speech.

The October budget is usually an update of how revenue and spending has been in the eight months since the 2012/13 plan was announced. Gordhan is unlikely to deviate too much from that.

Two days after Zuma's call for an "accelerated infrastructure roll out", the president gave the same infrastructure spending figure that he had announced at the start of the year.

"We believe the National Treasury will attempt to portray a very conservative line on both its deficit path and issuance projections in order to send a strong signal (to the ANC) that the Treasury remains in control of the budget process and is fiscally conservative," Nomura analyst Peter Attard Montalto said.

This would also send a "warning shot across the bows" of credit-ratings agencies, which the government accuses of knee-jerk reactions to the troubles - including the police killing of 34 striking platinum miners, he said.

Moody's and Standard and Poor's have both cut their South African ratings a notch in the last month, expecting pressure to throw money at the problem will derail Finance Minister Pravin Gordhan's long-term plans to balance the books.

But the consensus of 16 economists polled by Reuters is for the 2012/13 budget deficit forecast to widen to 4.8% of GDP, just 0.2 of a percentage point more than projected in the annual budget in February.

Gordhan last week expressed surprise at the rating downgrades, saying there was no evidence that the strikes would "throw us off course", while acknowledging that more needed to be done to improve conditions for miners.

South Africa has a history of underspending on its infrastructure spending vows, which may give financial scope to offset any increased social spending.

In February the Treasury said South Africa has the capacity to build large and complex projects "yet many public entities struggle to manage their planning responsibilities or spend their capital budgets."

Fitch plans a rating review in January - after the ANC election and Thursday's Medium Term Budget Policy Statement.

Sluggish growth

After a string of government surpluses this century, South Africa's budget slid into deficit in a 2008/09 recession, and a relatively sluggish recovery has left Gordhan continually pushing out the timetable for bringing spending back into line.

Investors expect this budget to be no different, although financial markets are likely to let Gordhan off the hook if it is clear that slippage is due to lower-than-forecast economic growth - and therefore revenues - rather than higher spending.

"We could actually see a better number announced just to try and appease the markets. It can delay the pain somewhat to the end of the fiscal year when he can ... factor in the impacts of the global economy on South Africa and the impact of the strikes on revenue collection," said Colen Garrow of Meganomics.

With the official unemployment rate at 25%, welfare grants and social protection now account for 9% of the budget - more than that put aside for education or health.

"Make no mistake the real challenge comes after the mini budget. The second half of the year is going to be a huge challenge for the minister's numbers," Garrow said.

The central bank last month cut its growth expectations to 2.6% for this year and said two weeks ago that figure would probably need to be revisited because of the strikes.

Gordhan has also made clear he will cut his 2012 growth forecast of 2.7% in Thursday's speech, suggesting a tight budget is his only option.

"I am not sure that the pace of growth will allow anything else," said Christopher Shiells, emerging market analyst for Informa Global Markets.

"But as long as the fiscal slippage is not down to increased spending and just due to the fact that growth is slower, then I don't think investors will punish South Africa too much."
anc  |  jacob zuma  |  pravin gordhan  |  bonds
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