‘Bad News’ Budget Expected as South Africa Seeks Stimulus Funds

(Bloomberg) -- Finding 50 billion rand ($3.5 billion) for a stimulus package is the unenviable task facing South African Finance Minister Tito Mboweni in the mid-term budget -- and he’s only two weeks into the job.

Mboweni has to do that after an inflation-beating wage increase for civil servants and with state companies burning cash. He also has to show on Wednesday how the government plans to stem escalating debt to help ward off another credit-rating downgrade, that its self-imposed spending ceiling remains intact, and that the first-half recession is a thing of the past.

The former central bank governor was appointed to the position on Oct. 9, after Nhlanhla Nene resigned, and will have little room to maneuver. A Bloomberg survey shows the government won’t meet its goal of narrowing the budget deficit to 3.6 percent of gross domestic product this fiscal year.

“There’s really no doubt that this year’s budget will contain a lot of bad news -- the only real question is how bad,” said John Ashbourne, an economist at Capital Economics Ltd. “Mboweni will prioritize holding to the deficit target, but this will require painful cuts. There isn’t, frankly, a lot of money available.”

President Cyril Ramaphosa’s recovery plan calls for spending to be rejigged to fund projects that can spur growth and cut into the country’s unemployment rate of 27 percent, near a 15-year high. This comes after Africa’s most-industrialized economy slipped into its first recession in a decade and S&P Global Ratings and Fitch Ratings Ltd. cut the nation’s debt to junk last year.

Investment Summit

Moody’s Investors Service, which still assesses South Africa at investment grade, warned this month it could follow suit if the government doesn’t stabilize debt.

Ramaphosa replaced Jacob Zuma as president in February, vowing to stimulate growth, attract investment, fix state companies and root out corruption. The budget comes a day before the start of a three-day investment summit to help lure $100 billion into the economy, with investors seeking evidence finances are under control.

“We expect some revenue under-performance, though the year-to-date data suggests that this should be modest,” said Elna Moolman, the head of economics at Standard Bank Group Ltd., Africa’s biggest lender. “The challenges will rather be on the expenditure side, where the higher-than-budgeted wage settlement, spending related to the presidential stimulus and recovery plan, and possible support for the state-owned companies would have to be accommodated.”

Higher Taxes

Economists in a Bloomberg survey estimate the budget deficit at 3.8 percent of GDP in the current fiscal year, and that it will be in line with the Treasury forecasts of 3.6 percent and 3.5 percent for the next two.

Gross debt was projected by officials in February to peak at 56 percent of GDP in 2021. While the cost of servicing this is the third-fastest growing expense in the budget, the projection was an improvement on the more than 60 percent given a year ago.

Personnel costs account for about 35 percent of state spending, and a three-year wage agreement will see 1.3 million civil servants getting raises of as much as 7 percent for the year through March 2019.

State firms have also been a drain on the budget, with large bailouts to power utility Eskom Holdings SOC Ltd. and South African Airways. Guarantees on debt to the companies total more than 460 billion rand, of which 65 percent has been taken up, according to the Treasury. That exposure was flagged by rating companies as one of the key risks for the economy.

Higher income tax rates and the first increase in value-added tax since 1993 may have helped plug the gap, but the burden has weighed on households amid rising fuel costs and there may not be space for further measures.

Mboweni is “in a very tight space,” Isaac Matshego, a senior economist at Nedbank Ltd., said by phone. “The government will tread very carefully.”

--With assistance from Ntando Thukwana.

To contact the reporters on this story: Ana Monteiro in Johannesburg at amonteiro4@bloomberg.net;Colleen Goko in Johannesburg at cgoko2@bloomberg.net;Sarina Yoo in Seoul at kyoo3@bloomberg.net

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Gordon Bell, Paul Richardson

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