Johannesburg - Finance Minister Pravin Gordhan will struggle to tame the government’s budget deficit as quickly as predicted earlier this year, as flagging economic growth curbs tax revenue, pushing up borrowing costs.
The gap will probably reach 5 percent of gross domestic product (GDP) in the year to March, according to the median estimate of 16 economists surveyed. That’s up from the 4.6 percent forecast by Gordhan in his February 27 Budget. Since then, 10-year bond yields have risen 70 basis points, the biggest gain after Turkey and Slovenia among emerging market nations in Europe, Africa and the Middle East, data show.
Gordhan, who presents his medium-term budget to legislators in Cape Town today, is under pressure to narrow the deficit from 5.1 percent in the previous year to prevent another downgrade of South Africa’s credit rating, which is on a negative outlook at Standard & Poor’s and Moody’s Investors Service. With strikes at gold mines and vehicle makers disrupting output, the economy is set to expand at its slowest pace this year since 2009.
“GDP growth has continuously been lower than forecast,” George Herman at Citadel Investment Services said on Monday. “That means the deficit ratio will come under pressure.”
The shortfall on the budget will probably narrow to 4.4 percent of GDP for fiscal 2015 and 3.6 percent the following year, according to the survey. Gordhan said in February the deficit would be 3.1 percent by 2016, based on economic growth projections of 2.7 percent this year, 3.5 percent next year and 3.8 percent in 2015.
Gordhan may be forced to trim back growth estimates to 2.1 percent this year and 2.9 percent in 2014, according to another survey of economists.
“Fiscal flexibility remains as constrained as ever while economic growth has continued to disappoint, a combination of a soft global outlook and a series of labour-related shocks to domestic activity,” Matthew Sharratt, an economist at Bank of America Merrill Lynch in Cape Town, said in a note to clients on Monday.
The widening budget deficit is pushing up government debt levels, which Gordhan said in February would reach 45 percent of GDP in the year to March 2016 from about 43 percent this year.
The rand has lost 14 percent against the dollar this year, the worst performer among 16 major currencies tracked by Bloomberg. Yields on rand bonds due in February 2023 climbed 4 basis points to 7.44 percent yesterday.
South Africa might face another credit rating downgrade if the government raised debt levels much further, Moody’s said in a report on October 12. Moody’s rates the nation at Baa1, the third-lowest investment grade and on par with Mexico, Thailand and Russia.
That threat means Gordhan will probably not renege on his pledge to rein in spending and borrowing, according to Carmen Nel, a fixed income analyst at Rand Merchant Bank. Under-spending by some government departments and a $2 billion (R20bn) bond issue earlier this year would help the finance minister plug a larger-than-expected budget deficit without raising domestic borrowing significantly, she said.
“Given the pressure on the sovereign’s credit rating and the structural constraint of low domestic savings, the finance minister has little room to give more stimulus via fiscal policy,” Nel wrote in an e-mail on Monday. “Concerns about fiscal slippage have dissipated.”
Warnings by rating companies “come as a reminder for the… Treasury that they really do need to make stronger efforts to try and rein in the budget deficit”, George Glynos of ETM Analytics said on Monday. – Bloomberg