SA finmin Nene expects slower growth but no recession

By Chris Vellacott and Sujata Rao

LONDON (Reuters) – South Africa is likely to cut its 2014 growth forecast next week but the government does not expect the economy to slip into recession, Finance Minister Nhlanhla Nene said on Wednesday.

The country, a top metals exporter, is feeling the impact of a slowdown in key market China and a fall in mining output, due largely to labour unrest.

It is also seen as vulnerable to an expected tightening of monetary policy in the United States, which could raise the cost of financing its high budget and balance of payments deficits.

"The conditions under which we tabled the budget in February has deteriorated so we are likely to see some downward revisions," Nene told Reuters on the sidelines of an investment conference organised by the Financial Times in London.

"We are only being realistic."

Nene ruled out a recession, however, saying: "Growth will be slower than expected, but won't be in the negative."

The government's current forecast is for growth of 2.7 percent this year, with a budget deficit of 4 percent of GDP.

South Africa's economy grew 0.6 percent in April-June on a quarter-on-quarter annualised basis, narrowly averting recession in the second quarter after contracting 0.6 percent in Q1.

Nene took over at the finance ministry in May and will present his debut budget statement next week. His comments confirm expectations he will cut economic growth forecasts while predicting a wider budget deficit.

But he said the counter-cyclical fiscal policy in place in South Africa allowed a measure of flexibility, meaning there would be some room to boost spending on essential items.

"The countercyclical fiscal policy allows our deficit to grow to be able to protect expenditure on our imperatives … we are moving in a direction to restrain expenditure in some areas but we need to look at revenue-raising measures also (and) also ensure we protect the poor and vulnerable," he added.

President Jacob Zuma's ruling African National Congress, which comfortably won an election in May, is struggling to deliver convincing economic growth to lift millions out of poverty and reduce unemployment of 25 percent.

The country may face more labour unrest after the longest mining strike in South Africa's history ended in June. Public sector unions are now demanding a 15 percent salary hike and have said strikes are possible if their demands are not met.

The government is expected to respond next week but Nene warned that a high wage settlement could "compromise headcount".

"We can only accommodate their demands within a tight envelope … Hopefully we will reach a settlement that takes into account the restrained fiscal environment we find ourselves in," he said.

FED FEARS

South Africa is part of a group of emerging economies that were hardest hit last year when the U.S. Federal Reserve first suggested it would start to unwind its money-printing programme.

The Fed is now on track to raise interest rates from 2015, raising fears that South Africa, Turkey and some other countries will find it tough to draw in cash from foreign investors with which to finance their hefty balance of payments deficits.

The rand has fallen 5.5 percent this year versus the rising dollar after a far greater depreciation last year.

Nene said hard times should be seen as an opportunity to reform and build resilience. South Africa was doing that by investing in infrastructure, he said, adding that a recent fall in oil prices was also likely to help the trade balance.

"Just as we benefited from capital inflows, we will also take the strain now," he said.

"We have to take into account (the Fed) have an economy to run so we actually have to build our own resilience mechanisms … Rather than complain about the spillover effects, we should also be looking at how we insulate ourselves as an emerging economy."