Bloomberg News

South Africa Drops From ‘Best in Class’ as Budget Gap Widens

October 24, 2011

(Adds bond yield, currency in seventh paragraph.)

Oct. 24 (Bloomberg) -- South Africa was posting budget surpluses as recently as three years ago. Now Finance Minister Pravin Gordhan is struggling to keep the deficit under control.

Gordhan, who gives his mid-term budget speech tomorrow, may increase his forecast for the fiscal gap to 5.4 percent of gross domestic product in the year beginning April 1 from 4.8 percent estimated in his February budget, according to the median estimate of seven economists surveyed by Bloomberg.

Tax revenue has deteriorated as Europe’s debt crisis and a weaker global recovery curbed demand for exports, eroded business confidence and stoked unemployment. Gordhan, 62, has little room to curb spending either as President Jacob Zuma, who faces re-election as ruling party leader next year, struggles to meet a pledge to slash a 25.7 percent jobless rate.

“South Africa three or four years ago was one of the best in its class in terms of fiscal balances and debt reduction,” Jean-Francois Mercier, an economist at Citigroup Inc. in Johannesburg, said in a telephone interview. “Now we have a deficit that, without being spectacular, is still high. It can’t stay forever at around 5 or 6 percent of GDP. That is not really sustainable.”

The budget has gone from a surplus of 0.7 percent of GDP in 2007 and 0.9 percent in 2008 to a deficit of 5 percent last year, while debt has climbed by 10 percentage points to 40 percent of GDP over four years, according to the National Treasury.

Bond Yields

The yield on the R157 benchmark bond, due 2015, may jump 20 basis points, or 0.2 percentage points, to 6.9 percent by the end of the year as the government sells more debt and investors reduce demand for riskier, emerging market assets, said Dennis Dykes, chief economist of Nedbank Group Ltd., South Africa’s fourth-largest bank.

The yield fell 1 basis point to 6.698 percent as of 9:50 a.m. in Johannesburg. The rand gained as much as 1.7 percent to 7.9007 against the dollar today, trimming its loss this year to 17 percent.

Gordhan will increase his forecast for the deficit to 5.5 percent of GDP in the year through March 31 compared with a February estimate of 5.3 percent, according to economists surveyed by Bloomberg. The minister will give his speech in Parliament in Cape Town at about 2 p.m. local time.

Credit Ratings

“It’s not a particularly comfortable place for the Treasury,” Wikus Furstenberg, a fund manager at Futuregrowth Asset Management in Cape Town, said in a phone interview. “We were all hoping for smaller net new issuance.”

South Africa’s debt, which is rated BBB+ by Standard & Poor’s, is seen as riskier than securities from lower-rated economies, such as Peru, Brazil and Mexico.

The cost to protect South African debt against non-payment for five years has surged 58 basis points to 182 this year, according to data provider CMA. That compares with 161 in Brazil, which has a credit rating two levels below South Africa, 157 in Mexico and 163 in Peru.

“For the rating to remain at the level where it is now, BBB+ with a stable outlook, we want to see in the medium term that the trajectory is turning again,” Konrad Reuss, S&P’s managing director for sub-Saharan Africa, said in a phone interview from Johannesburg. “If growth were to slow further as we go into next year, everything would really hinge on the policy responses to that.”

Greek Protests

Gordhan isn’t the only policy maker struggling to rein in budget deficits. Protesters hurling rocks in Athens clashed with police last week as Greece’s parliament passed an austerity plan for further job layoffs and wage cuts. Mexico, Thailand, Venezuela and Hungary are among emerging markets that are forecasting wider deficits than predicted as revenue slides.

Gordhan may be forced to trim his forecast for economic growth this year to 3.1 percent from 3.4 percent and lower next year’s estimate to 3.3 percent from 4.1 percent, according to the median estimate of seven economists surveyed by Bloomberg. Africa’s biggest economy expanded at an annualized rate of 1.3 percent in the second quarter, the slowest pace in about two years, as manufacturing and mining output plunged.

“The situation certainly has worsened since they put together the budget,” Dykes said. “The markets will be looking for some action to contain spending in this global environment and to make spending as effective as possible.”

Rising Debt Levels

Growth is lagging behind the 7 percent annual expansion Zuma says is needed to meet his target of creating 5 million new jobs by 2020 to reduce the unemployment rate to 14 percent. Failure to curb government spending may boost debt levels, which are set to rise to 43 percent of GDP in the 2013 fiscal year from an estimated 40 percent this year, according to the Treasury’s data. That compares with 38 percent in Brazil, 40 percent in Thailand and 61 percent in Spain.

As he tries to cut the deficit, Gordhan is also under pressure to find money to improve hospitals and train doctors ahead of a new national health insurance plan that starts next year. Spending on health care may climb to 6.1 percent of GDP by 2025 from 3.9 percent last year to implement the program, according to Econex, an economic advisory service in Cape Town.

“The national health insurance is unaffordable,” Dawie Roodt, chief economist of Efficient Group in Pretoria, said in a telephone interview. “The thing with fiscal finances is that you can push it and push it until suddenly it collapses. That’s what happened to Greece.”

--With assistance from Robert Brand in Cape Town. Editors: Nasreen Seria, Anne Swardson

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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