18 February 2010

South Africa: Budget Deficit Less Than Feared and Dropping

Johannesburg — The budget deficit would be smaller than expected for the fiscal year ending next month, and was on track to subside to more sustainable levels in the next couple of years, the Treasury said yesterday.

In his maiden budget, Finance Minister Pravin Gordhan showed that President Jacob Zuma 's new administration was committed to fiscal discipline despite pressure for more populist policies.

"Higher government borrowing is only a temporary solution to our economic policies," he said. " To ensure that future growth and public service delivery are not compromised by unchecked rises in interest costs, our medium- term fiscal framework allows for a general reduction in the budget deficit."

The shortfall will swell to 7,3% of gross domestic product (GDP) in the 2009-10 fiscal year, with tax revenue falling R69bn short of last year's budget estimate.

That contrasts with a deficit of just 1% of GDP the previous year, and modest surpluses in the two years prior to then. It is below the estimate of 7,6% predicted by the Treasury late last year, and more benign than many analysts had expected. "Revenues didn't decline as fast as we thought they would," Treasury director-general Lesetja Kganyago told reporters.

He said the shortfall was also reduced by a R7,8bn capital expenditure allocation that did not take place. The Treasury kept its forecasts for budget deficits in the coming three fiscal years unchanged from last October, at 6,2%, 5% and 4,2% of GDP respectively. Borrowing is climbing mainly to fund an R846bn infrastructure spending programme, which will expand the potential growth rate of SA's economy.

But the Treasury's latest estimates showed it would remain below levels which would trigger alarm bells at credit rating agencies. The government's net debt would nearly double to R1,3-trillion in 2012-13 from R690bn in 2009-10, pushing debt costs up to R104bn from R57,6bn. Net debt would peak at 44% of GDP in 2015-16 before stabilising, while debt costs would rise to 3,2% of GDP from 2,4% this year.

Real growth in public spending, which takes inflation into account, would rise just 2% a year over the next three years, compared with an average pace of 7,2% over the previous period. Public wage growth would have to "moderate" after nearly doubling in five years, Gordhan said. Foreign borrowing, which could undermine SA's benign debt profile, would remain in check, at 11,8% of the total this year and 10,6% over each of the next two years.

Future foreign currency commitments would be met by borrowing 2bn from global markets this year and next, rising to 3bn in 2012-13. Foreign borrowing doubled to 2bn last year in response to investor demand.

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