South Africa has been forced to cut its growth forecast for the year as the continent’s largest economy struggles, but the government has been buoyed by a narrowing of the budget deficit.
Delivering his annual budget in advance of the May 7 general election, Pravin Gordhan, the finance minister, said he expected gross domestic product to expand by 2.7 per cent in 2014 – down from his estimate of 3 per cent in October.
It would be an improvement on the economy’s poor performance last year, when it recorded growth of 1.9 per cent, but far below the levels needed to tackle widespread unemployment and poverty.
Still, despite lacklustre growth, higher-than-expected tax revenues helped to narrow the budget deficit from 4.2 per cent of GDP to 4 per cent for the financial year ending in March. It is forecast to narrow further to 2.8 per cent of GDP by 2016-17 if Mr Gordhan fulfils his pledges to keep a tight rein on spending.
The improved fiscal performance is a boost for a nation that has been lumped among the so-called fragile five emerging-market economies at risk to global volatility and the reverberations of the US slowing its quantitative easing programme.
The rand has weakened sharply over the past 12 months, while South Africa’s twin deficits, combined with high unemployment and sluggish growth, have led some analysts to say that it is at risk of a ratings downgrade.
Razia Khan, an economist at Standard Chartered, said she expected the market to react positively to the deficit projections. But she added that if markets were gripped by a new bout of global volatility, “the emphasis on South Africa’s key weaknesses is likely to remain”.
“While the threat of near-term ratings action has probably been diminished by the presentation of encouraging fiscal projections, and reduced deficits, South Africa’s external vulnerabilities are likely to remain in place,” she said.
The economy has struggled since a 2009 recession, partly because of global factors, but also because of domestic problems, including regulatory uncertainty, rising employment and electricity costs, infrastructure bottlenecks and labour unrest.
Jobs and growth have become key campaigning issues in the run-up to national elections, with the ruling African National Congress facing what many are predicting will be the most competitive poll since the first democratic vote in 1994.
Mr Gordhan said South Africa had made huge strides, but acknowledged that the nation still faced “an immense set of tasks and challenges”.
“We cannot just muddle through the next decade,” he said. “We need to do more, together with labour, business and all stakeholders, to lead our economy in a new, bold direction for higher growth, decent work and greater equality.”
In what appeared to be a retort to Julius Malema, the radical former ANC youth leader who is leading a new opposition party into the elections, he gave warning that a new economic order could not be built on “populist slogans or unrealistic promises”.
Mr Gordhan said risks to the positive outlook included further delays to delivery of new infrastructure, particularly power supplies, and protracted labour disputes. Both problems are blamed for stymieing investment and economic activity.
Last week, Eskom, the state-owned utility, declared an emergency and told leading energy users – mainly mining companies – to reduce their consumption by 10 per cent, as it battled to keep the lights on with limited capacity.
Meanwhile, a wage strike in its fifth week at the world’s top three platinum producers – Anglo American Platinum, Impala Platinum and Lonmin – has already cost the companies more than R5bn ($461m) in lost revenue.
Platinum is a vital source of export earnings for the country, which is burdened with a current account deficit of 6.8 per cent of GDP. Mr Gordhan said net debt would stabilise at about 45 per cent of GDP in 2016-17, adding that the government expected to issue its first Islamic bond, or sukuk, this year.
The bond sale, expected to be $500m, will be an important step as African states start embracing Islamic finance and reach out to Middle East funds.
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