Concern despite ratings negative budget

2013-02-27 21:28 - Reuters
Pravin Gordhan
Finance Minister Pravin Gordhan delivered his fourth Budget Speech, explaining how he plans to spend what's in the government's purse. (AFP) ~

Cape Town - While vowing to keep a lid on overall spending, Finance Minister Pravin Gordhan committed to more social spending for South Africa's poorest, many who live in shanty townships and are a key support base for President Jacob Zuma as he gears up for general elections early next year.

"This government will not get to the point where we impose austerity on our people," Gordhan said, alluding to fiscal tightening measures that have triggered violent protests in European countries such as Greece.

Subdued European demand for its exports forced South Africa to cut its 2013 economic growth forecast on Wednesday, while missed revenue targets looked to be creating a wider budget deficit than first thought.

In his three-year budget tabled to parliament, Gordhan said the 2013 budget deficit would be 4.6% of GDP, a shade wider than his last forecast in October.

However, the deficit is slightly narrower than economists' forecasts and a big decline from the 5.2% gap projected for 2012/13.

This year's shortfall was partly to due reduced tax and mineral rights revenue from the mining sector, hit by strikes last year that left more than 50 people dead and shaved R15bn ($1.7bn) of output.

South Africa remains the laggard among its peers in the Brics group of leading emerging market economies, with China expecting growth of 8.2% this year, followed by 5.9% for India and 3.5% in Brazil.

With growth flatlining in Europe, South Africa's main export market, Gordhan was forced to cut this year's growth forecast once again to 2.7% - half South Africa's pre-2008 financial crisis average.

The relatively subdued longer-term outlook also means the economy has little chance of making any inroads into the persistent 25% unemployment, regarded as the main threat to social stability two decades after the end of apartheid.

"If growth continues along the present trajectory, substantial spending commitments would require significant adjustments in revenue and reductions in other areas of spending," Gordhan said.

Consumption muted

Domestic consumer demand, which accounts for about 60% of GDP, is likely to remain modest as households struggle to find jobs while existing debt levels remain high.

Gordhan said the government, still smarting from credit downgrades from Moody's, Standard & Poor's and Fitch, would keep a tight grip on its purse strings, with plans to reduce spending by R10.4bn ($1.2bn).

"The deficit is there because of the revenue loss that we have experienced, not because of expenditure," Gordhan said in a news conference before his speech to parliament.

The projected deficits are unlikely to improve South Africa's credit ratings, which now stand slightly above the investment grade cut-off, analysts said.

"Under the circumstances, (the government) probably struck a reasonable balance given the fiscal constraints and difficult economic circumstances," Renaissance Capital economist Elna Moolman said.

"Today's budget was ratings negative - on its own it does not justify further downgrades, but at the same time it also will not allay the concerns of the ratings agencies sufficiently to rule out further downgrades down the line."

Gordhan said the government, which has faced a series of protests against poor basic services in the impoverished townships, would continue pouring money into infrastructure, education and the health service.

Spending on social services, which have risen by 11% in the last five years, were seen increasing to R12bn rand next year, Gordhan said.

The rand weakened after the budget, and was last at R8.8850/$, from R8.835/$ before Gordhan began his address.

Government bonds weakened, weighed down by plans to increase issuance to R165bn a year over the next three years.

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