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South Africa finance minister warns economy at ‘turning point’

Published on 22/10/2014

South Africa's economy is at a "turning point" and the government must cap spending and raise taxes to tackle its soaring deficit in the face of stalling growth, the finance minister said Wednesday.

Presenting his first mid-term budget Nhlanhla Nene slashed this year’s growth forecast to 1.4 percent, from the 2.7 percent estimated in the February budget.

Nene blamed the slide partly on the global environment, but admitted that it also reflected domestic energy shortages, strikes and “administrative shortcomings”.

“The budget deficit is high, debt levels have approached the limits of sustainability,” he told reporters ahead of his parliamentary statement.

He also hinted at the possible privatisation of some state assets — a move the government has resisted for years.

Economic growth is expected to rise to three percent in 2017, but that is still well below South Africa’s potential and means the government is unable to raise as much tax as it expects — and needs — to tackle ailing public finances, he said.

It also falls far short of the growth needed to tackle unemployment, which is running at more than 25 percent, and the consequent social unrest.

As a result of slow growth, tax revenue was below projections, pushing the deficit up to 4.1 percent of gross domestic product (GDP), Nene said.

“We have reached a turning point. Fiscal consolidation can no longer be postponed,” he said, in a nod to the ratings agencies.

Standard and Poor’s lowered South Africa’s sovereign rating to one level above junk status in June, heaping pressure on the government to better balance its books.

The country narrowly escaped a recession in the first half of the year.

– ‘Waste and corruption’ –

Nene outlined steps aimed at reducing the budget deficit to 2.5 percent over the next three years, including fighting “waste and corruption”.

While shunning the word privatisation, Nene told parliament that “in some instances government will dispose of non-strategic assets to raise resources for financial support”.

These assets could include “property, direct and indirect shareholdings in listed firms, non-strategic government shareholdings in state-owned companies and surplus cash balances in public entities”.

Razia Khan, head of Africa macroeconomics at Standard Chartered, said the budget “surprises positively in many respects” and “significantly diminishes the risk of further ratings action in the near-term”.

On the troubled state-owned power supplier Eskom, the minister said the company would borrow a total of 250 billion rand ($22.6 billion, 18 billion euros) over the next five years, supported by existing government guarantees.

“Government will provide at least 20 billion rand of funding, raised through the sale of non-strategic assets,” Nene said.

“If necessary, consideration will be given to a partial equity conversion of the 60 billion rand loan that has already been provided.”

In a year that marks the 20th anniversary of the end of the hated racist system of apartheid, Nene also pledged: “We will not balance the budget on the backs of the poor.”

Analysts have pointed out that will be difficult, with more than half of all state revenue consumed by welfare payments and the public service.

Since the end of apartheid, the government has pumped money into efforts to transform an economy formerly dominated by the white minority and raise living standards for blacks.

At the news conference, the minister dismissed a suggestion that South Africa was now adopting austerity measures as an “alarmist characterisation”.

He said there would be a reduction in the rate of growth of government spending, not a cut in current levels.

To help fund the spending, additional revenue of about 15 billion rand a year would need to be raised, Nene said, without providing any details.

The tax measures will be outlined in the budget in February.

Earlier on Wednesday, Statistics South Africa reported that inflation slowed to 5.9 percent last month from 6.4 percent in August, falling to within the central bank’s target range.