Gordhan's budget looks to steer SA from junk rating

2016-02-23 11:59 - Rene Vollgraaff
Finance Minister Pravin Gordhan. (Photo: GCIS)

Johannesburg - Finance Minister Pravin Gordhan faces a difficult challenge: restoring confidence in economic policy, keeping the nation from losing its investment-grade credit rating and staving off recession.

In his first budget speech on Wednesday since being reinstalled to the job in December, Gordhan, 66, must contend with dwindling revenue as commodity prices plunge, the worst drought in more than a century and slowing economic growth.

With debt rising and Standard & Poor’s threatening to cut the nation’s credit rating from BBB-, the lowest investment grade, Gordhan has little room to manoeuvre. At the same time, businesses and investors are looking to him to restore policy confidence after President Jacob Zuma damaged sentiment in December when he replaced his finance minister at the time, Nhlanhla Nene, with a little-known lawmaker.

Zuma backtracked on his decision four days later and reappointed Gordhan to a post he had held between 2009 and 2014 after the rand and bonds plummeted.

“It will be a market-friendly budget, but the minister is very limited in terms of spending,” Thabi Leoka, an economic strategist at Argon Asset Management, said by phone from Johannesburg.

“He will want to articulate measures that the government is hoping to implement in the hope of trying to keep us from getting downgraded, but we need to see implementation.”

Here’s what may be in store for the budget, the seventh under Zuma’s presidency:

More debt

Nene had estimated in October that the budget deficit in the year through March 2017 will narrow to 3.3% of gross domestic product from a projected 3.8% this year. Reducing that shortfall will probably take longer, with the deficit likely to reach 3.5% in 2016/17, according to the median of 21 economists’ forecasts compiled by Bloomberg.

Gross debt is set to exceed 50% of GDP and could surge as high a 55% in 2018/19 without “structural improvements in revenue,” according to Morgan Stanley economist Andrea Masia. The government will need to issue an extra R23bn ($1.5bn) in debt, including R8bn of short-term securities such as Treasury bills, to fund the budget shortfall over the next three years, Masia said in a note.

Higher taxes

Nene raised personal income taxes last year for the first time in two decades and Gordhan will probably take similar steps to help curb the budget shortfall. He has already received the backing of business leaders for higher taxes following recent meetings with them. The government gradually cut the corporate tax rate to 28% from 48% in 1993, while the value- added tax rate has been at 14% for more than two decades.

A 1 percentage-point increase in VAT could raise as much as R15bn a year in additional income, according to BNP Paribas Securities South Africa. That may prove politically unpopular in a year in which the ruling party is seeking to win votes in local council elections, said Johann Els, an economist at Old Mutual Investment Group.

Spending cuts

Gordhan may reduce spending targets over the next three years by forcing government departments to cut waste, such as travel and entertainment costs, according to Barclays Group Africa’s investment banking unit. Government expenditure has grown on average 8.9% annually in the past three years to reach about R1.25trn this fiscal year and was projected to increase 5.3% next year.

The International Monetary Fund, World Bank and South African Reserve Bank have all cut their 2016 economic growth forecasts to less than 1%, a key concern for credit- rating companies. Gordhan will probably reduce the Treasury’s projection of 1.7% growth for this year and 2.6% for 2017 published in October.

“Pencilling in growth above 1% this year would raise serious questions over the credibility of the whole document, similarly for growth rates above 2% for next year,” Peter Attard Montalto, an economist at Nomura in London, said in an emailed note to clients.

Unforeseen expenses

Gordhan will need to find extra money to fund the government’s pledge of no fee increases for university students and assist farmers whose crops and livestock are threatened by drought. That task is made more difficult by the government’s awarding of above-inflation wage increases to civil servants over the next three years.

The budget probably won’t have much detail on big expenditure projects like the 9 600-megawatt nuclear program or the National Health Insurance plan, according to BNP’s South Africa economist, Jeffrey Schultz. Gordhan may also give more information about possible “non-strategic” state assets that can be sold to raise cash for the government, according to Nedbank.