Bloomberg News

Gordhan Unexpectedly Cuts South Africa Budget Deficit Target

February 22, 2012

(Updates with comments from Gordhan in fifth paragraph.)

Feb. 22 (Bloomberg) -- South African Finance Minister Pravin Gordhan unexpectedly cut the budget deficit target for next year as tax revenue is set to climb, easing investors’ concerns about rising debt in Africa’s largest economy.

The fiscal gap will narrow to 4.6 percent of gross domestic product in the year through March 2013, lower than an October forecast of 5.2 percent, Gordhan told lawmakers in Cape Town today. The median estimate in a Bloomberg survey of 10 analysts was for a shortfall of 5.4 percent.

Gordhan is curbing spending on wages and raising taxes to rein in a budget deficit that led Moody’s Investors Service and Fitch Ratings to cut the outlook on South African debt to negative from stable in the past four months. At the same time, the government is ramping up expenditure on railways, power plants and ports to bolster economic growth and create jobs for the one in four people without work.

“This is a fairly neat way of moving toward fiscal discipline, but still giving some economic stimulus,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, said in a telephone interview. “This will be pleasing for the ratings agencies and may ease some of the concerns about fiscal sustainability.”

South Africa has taken necessary steps to have its credit rating outlook raised to stable from negative, avoiding a possible downgrade, Gordhan said in an interview in Cape Town today after his speech. Debt levels are “moderate” and aren’t a source of concern, Gordhan said in an interview on Talk Radio 702 today.

Credit Outlook

The deficit will reach 4.8 percent of GDP in the year ending March 31, down from an October estimate of 5.5 percent, as company tax earnings exceed projections, according to the National Treasury. The fiscal gap will ease to 4 percent of GDP in the 12 months through March 2014 and 3 percent in the year after that, compared with earlier forecasts of 4.5 percent and 3.3 percent for the same periods.

The rand gained as much as 0.5 percent to 7.7021 per dollar in Johannesburg after Gordhan spoke in Parliament. The yield on the benchmark rand bond due in 2015 fell as much as 5 basis points, or 0.05 percentage point, to 6.58 percent.

South Africa is “stabilizing the fiscal position without burdening the economy and future generations with excessive debt,” Gordhan said. The budget aims to “accelerate growth, expand investment, support economic development and confront poverty and inequality.”

Rating Outlook

Government borrowing, including that of state-owned companies such as Eskom SOC Holdings Ltd., will ease to 5 percent of GDP in three years’ time from 7.1 percent this year. State debt will peak at 1.5 trillion rand, or 38.5 percent of GDP, in the year through March 2015, compared with 39.7 percent estimated in October.

Fitch lowered the outlook on South Africa’s BBB+ rating to negative from stable last month as government debt and unemployment increased. Moody’s cut its outlook in November, citing “heightened political risk.”

The deficit is narrowing even as the economy is forecast to expand at a slower pace this year, mainly because inflation will boost tax earnings, Michael Sachs, chief director of fiscal policy at the Treasury, said in an interview. Economic growth will reach 2.7 percent this year, down from October’s estimate of 3.4 percent, and accelerate to 3.6 percent in 2013 and 4.2 percent in 2014.

“An uncertain global growth outlook and the need to rebuild fiscal buffers means that state resources will remain constrained for some time to come,” according to the Budget Review.

Wage Restraint

Revenue will rise to 904.8 billion rand in the year through March 2013, 15 billion rand more than was forecast in October, according to the Treasury. The government estimates it will boost revenue by 11 percent a year in the two years after that.

Gordhan is keeping spending in check by limiting wage increases to 5 percent annually over the next three years. Government expenditure will increase at a slower pace than economic growth, reaching 1.06 trillion rand in the year through March 2013.

The wage bill, which reached 39 percent of non-interest government spending this year, “has resulted in fewer resources available for social and economic infrastructure, and other priorities,” the Treasury said.

--With assistance from Mike Cohen and Robert Brand in Cape Town. Editors: Nasreen Seria, Gordon Bell

To contact the reporter on this story: Andres R. Martinez in Johannesburg at

To contact the editor responsible for this story: Andrew J. Barden at

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