Growth forecasts ‘too high or too low’

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IOL pic feb27 pravin gordhan budget speech 2014

Reuters

Finance Minister Pravin Gordhan delivers his 2014 Budget speech in Parliament in Cape Town on February 26, 2014. South Africa cut this year's growth forecast to 2.7 percent, saying deep challenges persisted after a 2009 recession. Picture: Mike Hutchings

Johannesburg - Economists are divided on the credibility of the growth forecasts made in Wednesday’s 2014/15 Budget.

Finance Minister Pravin Gordhan projected 2.7 percent growth this year followed by 3.2 percent and 3.5 percent in subsequent years. Based on these estimates, he calculated that the budget deficit – the gap between revenue and spending – would fall below 3 percent of gross domestic product (GDP) by 2016/17.

Kristin Lindow, a senior vice-president at Moody’s Investors Service, said yesterday that the forecast for this year was “somewhat higher than consensus”, but lower than Moody’s forecast for growth of just below 3 percent.

“[The Treasury has] assumed no boost from the depreciation of the rand but we’re already seeing that come through in company profits, so we think they’re just being as cautious as they can be on that score.”

But she noted: “If the external environment is even less buoyant than [the Treasury’s] already conservative forecast, if there is another steep depreciation of the rand that unsettles foreign investors or if inflation and interest rates rise significantly more than anticipated, we would expect the fiscal outcome to be less favourable than projected.”

And she warned: “If the election results lead to a more populist strategy, we would see more reticence from foreign investors to participate as actively in the local government bond market, which would have negative consequences for the cost and availability of funding.”

Azar Jammine, the chief economist at Econometrix, described Gordhan’s growth forecasts as “achievable” and estimated the economy would expand 3 percent this year.

But some analysts have their doubts. Barclays economist Peter Worthington described the forecast as “a little optimistic” and said it was “vulnerable to setbacks. We think rate hikes, supply constraints and labour market unrest mean growth is unlikely to hit 2.7 percent.”

Jac Laubscher, Sanlam’s chief economist, had similar reservations, predicting 2 percent to 2.5 percent. And he warned: “The growth momentum going forward will also be weaker and the forecasts for future years may also turn out to have been unrealistic.”

Razia Khan, the head of Africa research at Standard Chartered, noted: “The risk is that the Treasury’s projections understate the impact of external volatility on South Africa.”

She also warned on debt costs, which would affect the size of future deficits. “Alter the interest rate assumptions, and debt levels could still rise much faster.”

Global interest rates are on a rising trend, as the US tightens its approach. There will be consequences for the tax flows if growth falls short of expectations. And therefore the deficit could turn out to be higher than projected on Wednesday.

If a deficit remains above 3 percent of GDP the interest bill becomes a burden on the economy.

Due to higher-than-expected revenue from personal and corporate income tax, Gordhan said, the deficit for the 2013/14 fiscal year would come in at only 4 percent of GDP, below the 4.2 percent estimate in October. - Business Report

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