South Africa’s economy to grow by 1.3% in 2017 on improved outlook, finance minister says

South African finance minister Pravin Gordhan has forecasted that the country’s economy will grow by 1.3% in 2017, the minister told parliamentarians during his annual budget speech on Wednesday. This is an upgrade on the 0.5% growth seen in 2016.

The slight improvement this year has been attributed to a strengthening of commodity prices, improved exchange rate environment, drought conditions abating in most of the country, and fewer disruptive industrial disputes. The finance minister also projected that electricity supply will be more reliable this year, in contrast to frequent power cuts the country has experienced over the last two years due to load shedding.

However, Gordhan warned that the growth figures were too low and inadequate. “The projected rate of growth is not sufficient enough to reduce unemployment or impact significantly on poverty and inequality,” he said. “It falls well short of our National Development Plan (NDP) targets.”

The NDP aims to eliminate poverty and reduce inequality in South Africa by 2030. The rand rallied slightly against the US dollar, reaching $1=R13.05 during his speech, but eventually settled at $1= R13.0979.

Reflecting on previous year, the finance minister said that the services sector was the main driver for growth, contributing to the creation of 120,000 new jobs, while manufacturing output was supported by buoyant sales in petrochemicals, food and beverages, and motor vehicles.

However, the mining sector continued to underperform because of low commodity prices. This resulted in the sector shedding more than 32,000 jobs in 2016, according to Stats SA.

“Weak business confidence and low levels of profitability weighed on investment across all sectors,” Gordhan said. In effort to boost investment in the short-term, the government will need to implement mining and land redistribution policies; switch television stations from analogue to digital, which will free up spectrum for broadband services; improve the investment environment in the country; ensure the workforce has the necessary skills sets; strengthen regional ties and trade links; and safeguard the country’s credit rating. The treasury has set aside around R44bn ($33.6bn) achieve the targets.

Burgeoning debt

The effects of a difficult 2016 for the country’s economy would still be felt this year, according to Gordhan, who revealed that debt stood at R2.2tn ($1.7tn). The finance minister warned that he expected South Africa to have a budget deficit of R149bn ($11.4bn), or 3.1% of GDP, in 2017.

To tackle the country’s debt, the treasury will raise the income-tax rate for those earning more than R1.5m ($114,411) a year to 45%, from 41%, while cutting public expenditure by R26bn ($2bn) over the next two years. The tax increase is expected to raise R28bn ($2.1bn) in revenues, according to Gordhan.

“Raising taxes when the economy is struggling is undesirable but unavoidable given the current fiscal circumstances,” he said. “Government is acutely aware of the difficult economic conditions facing the majority of South Africans, but deferring tax increases by accumulating more public debt would ultimately impose a greater burden on citizens.”

Taku Dzimwasha