In what was arguably one of the most anticipated budget speeches in South Africa’s recent history, finance minister Pravin Gordhan announced that the government’s main aim for the coming year would be fiscal consolidation – despite having to grapple with low growth projections.
Against a backdrop of slow growth, rising debt and increasing interest rates, Gordhan declared the government will reduce the budget deficit to 2.4% by 2019, cut expenditure by R25bn over the next three years and increase tax revenue by R18bn by 2017.
Meanwhile, GDP growth for 2016 was revised to 0.9% compared with earlier estimates of 1.7%.
Some analysts argue that the budget hasn’t gone far enough, avoiding controversial questions around income tax and VAT as well as proposals to sell off state owned assets to shore up much needed revenue.
As William Jackson, senior emerging market economist at Capital Economics says: “South Africa’s 2016 budget was a damp squib and is likely to dent the government’s recent efforts to regain economic policymaking credibility.
“While the budget is now based on more realistic growth forecasts, the revenue-raising measures announced today don’t seem to amount to much and didn’t live up to expectations following President Jacob Zuma’s state of the nation address. Moreover, there was little said about privatization in South Africa which would help boost revenue.”
Zuma’s address on 11 February stressed an about turn in policy for the President – criticised by some for his lavish spending – when he called for fiscal restraint to pacify anxious investors and ratings agencies, disappointed by South Africa’s growth trajectory.
Since Zuma took office in 2009, debt in South Africa has almost doubled in size to 43% of GDP as the government ploughed money into the wage bill, social services and power production.
Following the budget speech, the rand fell sharply against the dollar losing nearly 3% of its value against the greenback.
As Samir Gadio, head of Africa strategy at Standard Chartered points out: “Ratings agency Moody’s downgraded Brazil’s rating to junk the day of the budget speech. This may have weighed on the rand in itself, even though the market was probably a bit wary of the revenue side of the equation in South Africa.”
While the budget was heralded by some as being pragmatic, given the difficult context, the risk of a downgrade from ratings agencies remains firmly on the cards, with subdued growth, structural reform, and continued shortfalls in revenue as serious risks to Gordhan’s goals.
“Because growth is lacking, budget targets in South Africa are fairly optimistic,” says Danelee Masia, senior economist South Africa at Deustche Bank
“We still see more than an even chance that ratings agency, Standard & Poor’s downgrades the credit this year, December more likely, especially if government remains slow to implement key growth reforms,” she says.
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