Cape Town - South African Finance Minister Pravin Gordhan will struggle to keep government debt under control even as he pledges to stick to spending targets.
Gross debt will balloon to 48 percent of gross domestic product in the year through March 2017 from an estimated 43 percent last year, the National Treasury said in its mid-term budget report released in Cape Town today.
That’s mainly due to rising debt costs and tax receipts falling short of targets.
While Gordhan, 64, is maintaining spending limits and curbing wage growth, allowing him to meet this year’s budget deficit target, borrowing will surge in the next three years.
That raises risks for South Africa as credit rating companies such as Moody’s Investors Service warn of another downgrade and US Federal Reserve scales back its monetary stimulus, boosting bond yields.
“We are running a sustainable fiscal ship and hopefully the ratings agencies will do their homework and recognize that in a very turbulent environment, and one in which we’ve got huge historical legacies to overcome, we actually are keeping a fairly good 19-year record and good fiscal management in South Africa,” Gordhan told reporters in Cape Town.
The fiscal deficit is forecast to reach 4.2 percent of GDP in the year through March, unchanged from last year, the Treasury said.\
The targets were restated to include extraordinary receipts, which include profit on bond sales and foreign-currency transactions.
In February, Gordhan forecast a shortfall, excluding extraordinary receipts, of 4.6 percent of GDP this fiscal year, down from 5.1 percent last year.
The deficit is forecast to narrow to 4.1 percent, 3.8 percent and 3 percent respectively in the next three fiscal years.
Moody’s cut South Africa’s credit rating in September last year to Baa1, the third-lowest investment grade level, while Standard & Poor’s and Fitch Ratings followed by cutting a further step.
Moody’s and S&P hold a negative outlook on South African debt, indicating a greater chance the rating will be downgraded than raised.
Gordhan trimmed his forecast for economic expansion this year to 2.1 percent from 2.7 percent as strikes in mining and manufacturing disrupted output and global growth remains weak.
The economy will probably expand 3 percent in 2014 and 3.2 percent the year after that, according to the Treasury.
“While expanded global trade and investment will boost our exports over time, South Africa cannot rely on global trends to achieve faster, more inclusive growth and job creation,” the minister said.
The rand has lost 14 percent against the dollar this year, the worst performer among 16 major currencies tracked by Bloomberg.
In the February budget, Gordhan had forecast gross debt to reach 45 percent of GDP by 2015/16 from an estimated 42 percent last year.
The International Monetary Fund said on October 1 that while South Africa should target a debt ratio of about 40 percent, a ceiling of about 50 percent to 60 percent may be sustainable.
South Africa’s reliance on foreign investors to finance the budget deficit has increased in recent months, adding to the nation’s economic risks, according to the Treasury.
Investor sentiment is volatile and capital allocation “is likely to shift as the US monetary authorities taper their asset purchase program,” it said.
“There is no magic in those ratios,” Lungisa Fuzile, director general of the Treasury, said in an interview in Cape Town.
“We would prefer to keep these ratios as low as possible but in the context of a counter-cyclical fiscal stance you don’t really target them. You tolerate a bit of a deterioration.” - Bloomberg News