South Africa budget leaves investors cold as deficit widens - BNN Bloomberg

(Bloomberg) — South Africa’s budget update showed public finances are under increasing pressure, increasing the need for the new coalition government to lure more investment into the region’s largest economy.

The budget deficit is expected to rise to 5% of gross domestic product in the year to March, Finance Minister Enoch Godongwana’s medium-term policy statement showed on Wednesday. That’s more than the 4.5% forecast in February, and higher than most economists predicted.

Africa’s largest economy is expected to grow by an average of 1.8% over the next three years, slightly more than previously estimated but still insufficient to keep pace with population growth.

The revised estimates, the first of the new 10-party government, illustrate the scale of the challenge it faces in achieving its goals of boosting production and employment and stabilizing state finances. The debt-to-gross domestic product ratio is still expected to stabilize in the 2025-2026 financial year, but is now at 75.5%, higher than the 75.3% expected in February.

The rand weakened 0.3% to 17.7159 per dollar at 2.41pm in Johannesburg after wiping out gains of as much as 0.7%, while 2035 government bond yields rose from a session low of 10.33% to 10.48%.

“We know our debt is unsustainable because the cost of debt servicing has become the largest part of our expenditure and is rising faster than economic growth,” Godongwana said in his speech to lawmakers in Cape Town. “To address this problem, we have taken difficult steps to reduce the budget deficit. We have limited spending and kept tax collections stable.”

Still, tax revenues for the current fiscal year are expected to be 22.3 billion rand ($1.27 billion) below target, with revenues from value-added tax, personal income tax and fuel taxes all disappointing.

“The target budget deficit is slightly larger than expected, which given that South Africa’s public finances are already in precarious shape, is not the ideal outcome that markets were hoping for,” said Brendan McKenna, economist and emerging markets strategist at Wells Fargo. “We are still optimistic about fiscal consolidation in the medium term.”

The National Treasury has allocated additional resources to fund a peacekeeping mission in the Democratic Republic of Congo and to cover debts arising from an abandoned highway toll project. The country also set aside 11 billion rand for an early retirement plan for civil servants over the next two years, a measure that should help contain the rapidly rising wage bill.

South Africa’s new alliance came to power in late June, a month after the African National Congress lost the parliamentary majority it had retained since the end of apartheid in 1994. The inclusion of the centrist Democratic Alliance and other business-friendly parties led to a rally in the country’s currency. , stocks and bonds, with investors confident that the government will tackle the logistical constraints, energy shortages and red tape that hinder businesses.

Some progress has been made: after years of blackouts, the country has had months of uninterrupted electricity, work visa rules have been revised and the government is opening rail lines to private operators.

The National Ministry of Finance said the government is evaluating various options to encourage private investment in infrastructure projects, including the development of a platform with a credit guarantee facility to help alleviate risks associated with public sector projects. New financing mechanisms are also being considered.

President Cyril Ramaphosa has promised to turn the country into a giant construction site. He estimates that as much as R1.6 trillion in public sector infrastructure investment and a further R3.2 trillion from the private sector will be needed for the country to achieve its infrastructure targets by 2030.

Fitch Ratings and Moody’s Ratings may revise their assessment of South Africa’s debt this week following the presentation of the budget update, while S&P Global Ratings’ assessment will take place from November 15. All three companies are rated below investment grade for South Africa with a stable outlook.

“It is a fool’s game to try to pre-empt rating decisions,” said Duncan Pieterse, director general of the Ministry of Finance. “I think they will be sympathetic to a Treasury that consistently outperforms its own targets.”

–With help from Mpho Hlakudi.

(Updates with market reaction in fifth paragraph.)