South Africa’s fiscal consolidation ‘under increasing pressure’

26 Oct 12
South Africa’s plans to reduce its debt and deficit are coming under increasing pressure as a result of slowing economic growth, Fitch Ratings warned today.

By Nick Mann | 26 October 2012

South Africa’s plans to reduce its debt and deficit are coming under increasing pressure as a result of slowing economic growth, Fitch Ratings warned today.

The country’s finance minister Pravin Gordhan revealed yesterday that South Africa’s economy was now expected to grow by 2.5% this year, and not 2.7% as forecast in February’s 2012/13 budget. This compares with 3.1% growth in 2011/12.

Delivering the government’s , Gordhan said the economy had been affected by global problems and disruptions to domestic production. As a result, revenue collection is expected to be R5bn less than forecast in February, leading to a budget deficit for 2012/13 of 4.8% of gross domestic product, and not 4.6% as previously expected.

Next year’s budget deficit is expected to be 4.5%, compared with 4% forecast in February. Last year, the government said it expected the 2013/14 budget deficit to be 3.2% of GDP, and Fitch said these upward revisions showed the government ‘appears to be falling behind on its longer-term fiscal consolidation programme’.

Debt levels are also expected to continue increasing until 2015/16, where gross debt is forecast to reach 42.7% of GDP, compared with 27% n 2008. This peak would put the country’s debt levels ‘slightly above’ that of other triple B-rated countries, Fitch noted.

Gordhan yesterday said that public spending had not increased above the 2.9% a year set out in February’s budget. But Fitch warned that any further spending increases would limit the country’s ‘already diminished fiscal headroom’.

The agency added: ‘High current expenditure, which includes spending on wages, subsidies and interest, makes up just over 90% of total expenditure and restricts the fiscal room available to counteract any economic shocks. It also limits the government's ability to deliver its ambitious infrastructure spending plans without taking on additional debt.’

Fitch also highlighted ‘long-standing structural problems’, in particular in relation to education and labour reform, which had contributed to South Africa’s weakening growth performance.

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