JOHANNESBURG — Finance Minister Nhlanhla Nene will face a baptism of fire when he unveils his first budget update this week as flagging growth and ballooning budget deficits take a toll on government finances, threatening to undermine South Africa’s international credit ratings.
Nene will be forced to paint a much bleaker picture of the economy than his predecessor Pravin Gordhan did in the February budget as long mining and manufacturing strikes reduced output — and tax revenue.
The issue is whether Nene can keep spending in check to avoid slippage in key debt ratios, which would eventually prompt credit-rating downgrades and in turn raise the cost of borrowing.
Details of plans to improve Eskom’s balance sheet will also come under scrutiny with the State-owned entity under a negative credit watch and at risk of its debt being downgraded to junk status if the rescue package is not convincing.
“A lot is riding on Nene’s ability to reassure markets, investors and credit-rating agencies that fiscal policy will be put on a sustainable path and there is a solution at hand to address Eskom’s large funding gap,” said Barclays Africa economist Peter Worthington.
This will be difficult as the biggest risk to the fiscus — public-sector pay rises — will not be resolved in the medium-term budget policy framework, which will outline spending plans, fiscal projections and economic forecasts for the next three years.
Powerful public-sector unions have demanded a 15% pay increase from next year while Gordhan budgeted for 6,4% annual increases over the medium term. Nene has warned that an increase of more than one percentage point above inflation — now hovering at just above 6% — will lead to job losses, but this has fallen on deaf ears.
“If you see an increase of more than one percentage point above inflation I think you’d see a negative reaction in the bond market and from rating agencies,” said Investec Asset Management economist Nazmeera Moola.
“It would show complete inability to stick to expenditure ceilings.”
Nene will significantly revise down the Treasury’s economic growth forecasts. It predicted gross domestic product would rise 2,7% this year, 3,2% next year and 3,5% in 2016.
But the International Monetary Fund revised its estimates down for the fourth time this year, to 1,4% this year and 2,3% next year.
The big attention grabber for markets will be the budget deficit forecasts. The trajectory over the next three years is crucial, as the government is likely to again postpone its goal of driving the deficit to below 3% of gross domestic product.
Analysts expect the shortfall to widen to between 4,3% and 5% for the fiscal year to March, compared with an official forecast of 4% in February.
“We can’t draw a picture every single year and then revise and revise it. We are painting ourselves into a corner, and the only way out is through tax increases,” said Stanlib economist Kevin Lings.
Tax increases will be unveiled only in February, but Nene may give clues on them this week.
— BD Live