Nene in fiscal straitjacket – cannot support economy now that it’s needed

In rugby parlance, South African Finance Minister Nhlanhla Nene has been given the mother of all hospital passes. He is being pressed from all sides to “do something” about an economy that is sliding ever closer to full blown recession. But after years of vote-catching profligacy from his boss President Jacob Zuma, there are simply no bullets left in the once well-stocked arsenal. Not only is the fiscal cupboard bare, but ratings agencies are watching, vulture-like, for a reason to drop the rating of South African debt to junk – a move that would add more pain to the 10% (R115bn) of the National Budget allocated to paying interest. Nene used some fancy footwork in February by promising R15bn in relief for contributors to an over-resourced Unemployment Insurance Fund – then later quietly withdrawing this “gift”. The UIF sleight of hand will help the numbers look a little better when the Mini Budget is unveiled tomorrow. Not by much. To quell the loudest squawks, public servant salaries, already 40% of State spending, were increased by more than Nene had budgeted in February, bringing additional pressure onto already overstretched resources. The definition of a developing country is where Politics trumps Economics. Don’t we just know it. – Alec Hogg

By Rene Vollgraaff and Sarina Yoo

(Bloomberg) — South African Finance Minister Nhlanhla Nene may be forced to abandon his budget-deficit targets as economic risks mount, straining the nation’s credit rating as it hovers above junk.

With the economy close to recession, Nene, 56, is set to downgrade growth and tax revenue forecasts when he presents his mid-term budget on Wednesday. The target for the fiscal gap in the year beginning April 1 will probably increase to 3.2 percent of gross domestic product from 2.6 percent, according to the median estimate of 12 economists surveyed by Bloomberg.

South African Finance Minister Nhlanhla Nene
South African Finance Minister Nhlanhla Nene

Nene has little room to spur an economy in desperate need of a boost. With debt levels approaching 50 percent of GDP, credit-rating companies are watching expenditure targets closely. The government is having to scale back spending at a time when mining companies such as Anglo American Platinum Ltd. are reining in investment and slashing jobs in the face of plunging commodity prices.

“The Treasury will have to downgrade South Africa’s growth forecasts yet again,” Nazmeera Moola, an economist and strategist at Investec Asset Management in Cape Town, said in an e-mailed note to clients. “The one thing the government cannot do is breach the expenditure ceiling for the next three years that they announced in the February budget.”

Read also: SA Q2 GDP contracts – power constraints, weak commodity prices stifle output

The government will probably lower its GDP forecast of 2 percent for this year and 2.4 percent in 2016, bringing it more in line with the central bank’s projections of 1.5 percent and 1.6 percent respectively.

Spending Pressures

That will curb revenue targets and widen the fiscal deficit unless Nene can reduce expenditure at the same time, a commitment that may prove difficult to make given spending pressures.

The government awarded civil servants higher pay increases this year than had been budgeted, reducing Nene’s flexibility. The minister said in a written reply to a lawmaker on Monday that the additional money for the wage bill will come from drawing down the contingency reserve, using funds available from departments that have underspent and reallocating some resources.

South Africa can ill afford a credit-rating downgrade with interest payments on debt already making up almost 10 percent of government spending. Fitch Ratings Ltd. has a negative outlook on South Africa’s BBB assessment, indicating it may cut the nation’s debt from two levels above junk when it publishes its next review in December. Standard & Poor’s and Moody’s Investors Service have stable outlooks on their ratings. Fitch’s assessment is in line with Moody’s and one level above S&P.

“If government now increases its expenditure significantly it’s going to have to borrow aggressively,” Isaac Matshego, an economist at Nedbank Group Ltd., said by phone from Johannesburg. “Borrowing aggressively will push our debt stock higher and debt-service costs will go through the roof.”

Yields on rand-denominated government bonds due December 2026 have risen 115 basis points to 8.19 percent since reaching a 19-month low on Jan. 29.

Read also: SA bonds likely to follow Brazil soon, already priced for downgrade to junk

A strong tax-collection effort this year will probably allow Nene to meet or slightly improve on his deficit target, bringing it down to 3.8 percent of GDP compared with February’s projection of 3.9 percent, according to economists surveyed by Bloomberg. The shortfall will reach 3 percent in 2017-18, according to the survey, compared with a previous goal of 2.5 percent.

Having already raised personal income taxes for the first time in two decades this year, more measures may follow to raise revenue. While major tax announcements aren’t made in the mid- term budget, Nene may cite findings from a government-appointed panel, known as the Davis Tax Committee, which recommended raising the value-added tax rate from 14 percent rather than increasing individual and company taxes. VAT hasn’t been increased since 1993, the year before the ruling African National Congress came to power.

“Maybe for the current fiscal year there aren’t any big adjustments necessary, but for the next two fiscal years, it might require quite a big reality check” related to tax collection, Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone. “The longer that reality check gets pushed out, the harder it is for the rating agencies to accept.”

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