By Nasreen Seria
Oct. 26 (Bloomberg) -- South Africa may this week announce increased budget plans for the next three years, abandoning a fiscal stance that has helped investors overlook rampant crime, mass unemployment, and income inequality for the past decade.
In his first mid-term budget speech tomorrow, Finance Minister Pravin Gordhan will forecast a deficit of 7.5 percent of gross domestic product for the year through March 2010, the highest since apartheid ended 15 years ago, according to the median estimate of 18 economists surveyed by Bloomberg. The government said in February the gap would be 3.8 percent of GDP.
President Jacob Zuma faces pressure from his backers in the labor unions to deliver on election promises to boost jobs and reduce poverty, as the South African economy endures its first recession in 17 years. Zuma, who came to power in May, inherited an economy with a jobless rate of 23.6 percent, the highest of 62 countries tracked by Bloomberg.
“Before the general election, we penciled in a long run deficit of 3 percent of GDP under the Zuma administration,” said Peter Attard Montalto, an economist at Nomura International Plc in London. “Allowing this to slip further would worry investors and mark a strong and unfavorable contrast with the previous administration.”
A 7.5 percent deficit will be the highest since records began in 1961. The deficit will ease to 5.6 percent of GDP in the 2011 fiscal year, according to the median estimate of 16 economists surveyed by Bloomberg. GDP probably will shrink about 2 percent this year, Gordhan said on Oct. 22.
As the recession causes the fiscal deficit to expand, bonds have slumped, with the yield on the R157 government bond, due 2015, surging 1.39 percentage points to 8.615 percent this year.
No Appetite
“The worry is on how they will fund the deficit,” said Montalto. “There is no political appetite to cut spending.”
Total government borrowing, including municipalities and state utilities such as Eskom Holdings Ltd., may rise to 250 billion rand, almost three times the 90.4 billion rand forecast in the February budget, said Johan Rossouw, an economist at Vunani Securities in Cape Town. Weekly bond sales, which currently amount to about 2.5 billion rand, may surge to 3.5 billion rand, Nomura’s Montalto said.
Miners such as Anglo Platinum Ltd., the world’s biggest producer of the metal, have fired thousands of workers and curbed output. Falling corporate profits and consumer spending mean the government will probably miss its tax revenue target by at least 70 billion rand ($9.4 billion) this fiscal year, Deputy President Kgalema Motlanthe said last month.
At the same time, the government plans to maintain spending on roads, railways and houses to boost growth, widening a budget gap that Motlanthe said may reach 8 percent of GDP this year.
Social Pressures
“It’s going to be cumbersome to rein it back,” said Rossouw. “The tax burden is already high, so either they have to cut spending or allow the deficit to balloon.”
Spending cuts may not be an option as social pressures mount. South Africa’s Gini coefficient, which measures inequality, was 0.666 in 2008, compared with 0.665 in 1994 when the African National Congress came to power, according to government data. A reading of 1 reflects complete inequality and zero represents complete equality.
The government announced on Oct. 22 that it will raise the age for children receiving grants to 18 from 15, in line with a Zuma election pledge. That will cost 7.4 billion rand over three years.
About 13 million children, pensioners and disabled people already receive grants. Growth in welfare payments is “unsustainable,” former Finance Minister Trevor Manuel said in February.
Policy Shift
Investors will be monitoring Gordhan’s statement for policy shifts that may reflect a growing influence of Zuma’s allies in the unions and the South African Communist Party.
The rand slumped as much as 1.8 percent on Oct. 22, trimming its gain this year to 26 percent, after the Beeld newspaper reported that Economic Development Minister Ebrahim Patel, previously head of the main clothing workers’ union, was drafting plans to fix the exchange rate. The ministry said the story had “absolutely no basis.”
“It has reignited the fears that were there before Zuma came to power,” said Bartosz Pawlowski, an emerging markets strategist at BNP Paribas in London. “The economic realities have been worse than policy makers predicted, so we may see more controversial or populist measures popping up. This has lit flashing lights” for investors.
Event Date
Shoprite Holdings Ltd. annual general meeting Oct. 26
Mid-term budget Oct. 27
Nu-World Holdings Ltd. annual earnings Oct. 27
SilverBridge Holdings Ltd. annual earnings Oct. 27
African Brick Centre Ltd. annual earnings Oct. 27
Unemployment data Oct. 27
ArcelorMittal South Africa third-quarter earnings Oct. 28
SABMiller Plc briefing on Africa Oct. 28
Consumer-price inflation Oct. 28
Gold Fields Ltd. first-quarter earnings Oct. 29
M3 and private sector credit data Oct. 29
Producer-price inflation data Oct. 29
Harmony Gold Mining Co. first-half earnings Oct. 30
Octodec Investments Ltd. first-half earnings Oct. 30
Trade data Oct. 30
To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net
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