Parliament - Finance Minister Pravin Gordhan stuck to a pledge to bring down the budget deficit by targeting civil-servant jobs and increasing wealth taxes, yet disappointing investors looking for bolder action to stave off a credit-rating downgrade to junk.
Gordhan, 66, faced a difficult balancing act in his first budget since being reinstalled to the job in December. He cushioned low-income earners from tax increases while cutting spending targets, providing support to an economy set to grow at the slowest pace since the 2009 recession without increasing the debt burden.
He pledged to narrow the fiscal deficit to 2.4 percent of gross domestic product in three years time from the current 3.9 percent. That was not enough to appease investors seeking more determined measures to boost revenue, including tax increases and sales of state-owned companies.
“It’s a lot of talk and rhetoric, but the changes to the numbers that are necessary to bring about what he promises are all in the outer years and based on very optimistic assumptions,” George Herman, head of South African investments at Citadel Investment Services, said by phone from Cape Town. “The markets don’t like this.”
The rand plunged against the dollar, euro and pound, sliding as much as 2.4 percent versus the US currency, the most since Jan. 15. The yield on the benchmark 10-year bond climbed as much as 21 basis points after the minister started speaking.
South Africa is at risk of losing its investment-grade credit-rating status because of slowing growth and rising debt. Standard & Poor’s has a negative outlook on the nation’s sovereign rating of BBB-, which is one level above junk.
Tax shortfall
The government will miss this year’s tax-revenue target, pushing up the budget shortfall slightly to 3.9 percent from 3.8 percent. The deficit will narrow to 3.2 percent in the fiscal year beginning April 1, better than the 3.5 percent median estimate of 21 economists surveyed by Bloomberg.
The budget “is focused on fiscal consolidation,” Gordhan said. “We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we can ignite growth and generate more revenue, we have to be tough on ourselves.”
Gross debt will rise to more than 50 percent of GDP for the first time in at least 25 years, according to the Treasury. Debt has almost doubled since President Jacob Zuma came to power in 2009, when the economy was facing recession and market turmoil linked to the global financial crisis.
Gordhan is seeking to restore policy credibility after Zuma sent the rand and bonds reeling when he unexpectedly fired Nhlanhla Nene as finance minister in December and replaced him with a little-known lawmaker, David van Rooyen. The market fallout and lobbying by business leaders led Zuma to backtrack on his decision four days later and reappoint Gordhan to a position he had held from 2009 until 2014.
Rating downgrade risk
While the minister didn’t mention the risk of a credit-rating downgrade in his speech, the National Treasury said in the Budget Review that under a best-case scenario, a cut to junk may cause interest rates to spike in the short-term and the rand to weaken further.
“In a less-favorable scenario, it could trigger a sharp reversal of capital flows and precipitate a recession,” which would require severe fiscal austerity measures, it said.
Gordhan raised taxes on capital gains and property sales to help boost revenue, while pledging to curb the civil service by eliminating non-essential jobs. He avoided lifting the value-added tax rate, which the National Treasury estimates could raise as much as 20 billion rand ($1.3 billion) in revenue if it was increased by 1 percentage point from 14 percent.
“Market expectations were a lot higher for a more austere budget,” Mike Schussler, chief economist at Johannesburg-based research group Economists.co.za, said by phone. “Will they really be able to curtail the wage bill? That’s the key question.”
Bloomberg