South Africa sees bigger budget shortfall as growth slows
By Stella Mapenzauswa CAPE TOWN (Reuters) - South Africa's economic growth will be slower and its budget deficit bigger this year than forecast, the finance ministry said on Wednesday, vowing to keep a tight grip on spending to stop the country's credit rating slipping to junk. In his first policy statement since being appointed in May, Finance Minister Nhlanhla Nene warned that Africa's most advanced economy was not making sufficient progress to reduce poverty and create jobs, deepening inequality. South Africa's economy, recently overtaken by Nigeria as the continent's largest, has been battered by waves of labour unrest that have hobbled output in the platinum mining and manufacturing sectors. Nene told parliament the weak economic performance had put a great deal of pressure on the public finances, "with revenue insufficient to cover expenditure". "The budget deficit is high, debt levels have approached the limits of sustainability, and the economy is vulnerable to global volatility," he said. The budget deficit for 2014/15 was seen at 4.1 percent of GDP, slightly wider than the 4 percent forecast by Nene's predecessor Pravin Gordhan in February. Economists polled recently by Reuters expected a 4.4 percent gap. The economy is expected to manage growth of just 1.4 percent in 2014, well below the 2.7 percent predicted in February. The Treasury said it would aim to keep spending in check and raise tax revenue over the next two years, stabilising the national debt at 2.4 trillion rand ($217 billion) by 2017-18. "Without an adjustment, it is likely that South Africa's sovereign debt would be downgraded to 'sub-investment grade', risking impaired access to credit markets," it warned. Standard & Poor's lowered Pretoria's rating by one notch to BBB-, the agency's lowest investment grade rating, in June, while Fitch maintained its BBB grade but revised its outlook to negative from stable. Both ratings agencies cited concerns about poor prospects for the economy, mainly because of a crippling platinum strike. DIMINISHED RISK OF MORE DOWNGRADES Despite the weaker growth forecasts, Wednesday's budget would significantly diminish the risk of further downgrades in the near term, Standard Chartered economist Razia Khan said. "Little could have demonstrated more clearly South Africa's commitment to curbing its fiscal deficit," she added. Government bonds gained in relief, with the yield on the benchmark 2026 issue dropping 10 basis points to a session low of 7.91 percent. The Treasury said the government plans to freeze new jobs in the public sector and ensure that financial support for state firms would not widen the budget deficit, It would inject 20 billion rand ($1.8 billion) of cash into struggling power utility Eskom, and possibly also convert its existing 60 billion rand subordinated loan to equity, but the firm would not receive any new financial guarantees. Nene pledged to continue pumping money into social services and said infrastructure investment would remain on track. The Treasury said economic growth would edge up steadily to 3 percent by 2017, supported by investments in energy and transport, a gradual pick-up in global growth and rising exports to other African states. But this was still a far cry from the 5 percent average required to cut unemployment from 25 percent.
