Budget puts lid on spending, bonds gain

South Africa projects a lower-than-expected 2012/13 budget deficit, reassuring bond investors and ratings agencies that the continent’s biggest economy is keeping a lid on spending despite huge social pressures and sluggish growth.

>>For a more detailed summary: Budget Speech 2012

Presenting the third budget of President Jacob Zuma’s administration, finance minister Pravin Gordhan said spending would exceed revenues by 153 billion rand ($19,9 billion), or 4,6% of gross domestic product (GDP).  

The shortfall is a slight improvement on 4,8% in this financial year but sharply lower than the 5,4% economists had been expecting, given a push by leftist factions of the ruling African National Congress to boost the safety net for South Africa’s legions of poor.  

After the loss of a million jobs in a 2009 recession, one in three of the country’s 50 million people are on some form of benefits.  

“South Africa’s finances are in good shape,” Gordhan told parliament in Cape Town, in a thinly veiled dig at the two ratings agencies that have cut their credit outlooks in the last three months, mainly due to fears about the effects of a slowdown in Europe and the United States.  

Bonds gained, pushing yields lower across the curve, amid relief the government was not going to flood the domestic debt market — far and away Africa’s deepest capital market — with new issuance.  

The yield on the 2026 bond dropped nine basis points to 8,19%, while that on the 2015 issue shed six basis points to 6,595%.  

In the budget fine-print, the Treasury said it would introduce five new bonds over the next 12 months to diversify the national debt structure.  

Two of the bonds will carry fixed returns, while three will be linked to inflation, and maturities will go out to 39 years.  

Europe weighs    

Despite his confidence, the economic crisis in Europe — South Africa’s main trading partner — forced Gordhan to cut his economic growth forecast for this year to 2,7% from a projection of 3,4% outlined in October.  

The reduction brings the government into line with the central bank and International Monetary Fund (IMF), but it also shows how far South Africa is from the 7% growth deemed necessary to make a dent in unemployment that refuses to drop much below 25%.  

With weak growth hitting tax receipts, Gordhan’s options are limited, and his main focus was on moving spending away from the mushrooming public sector wage bill to big-ticket infrastructure projects that should ultimately boost growth and jobs.  

“On the wage bill, we have to do things differently,” he told reporters in a pre-budget briefing. “We cannot carry on as we are.”  

That strategy shows through in a projected pick-up in growth over the next three years, as well as a deficit now forecast to narrow to 3% of GDP by 2014/15.  

The projection is well within the realms of fiscal sustainability, but sits in marked contrast to the two years of budget surplus that South Africa ran in the two years leading up to the global financial crisis.  

Gordhan also said total public debt should stabilise at 38,5% of output by 2015 — a ratio that debt-laden rich countries, especially in Europe, can only dream of.