UPDATE 2-South Africa cuts growth forecast, sees tighter budget gap

Wed Oct 23, 2013 12:56pm EDT

* Strikes, power shortages weigh on growth

* Gordhan says running sustainable fiscal ship

* Current account deficit to stay above 6 percent of GDP

* Gordhan says central bank supportive of growth

By Stella Mapenzauswa

CAPE TOWN, Oct 23 (Reuters) - South Africa's government said the economy would expand less than hoped this year due to strikes and power shortages but promised to keep state finances in check, also cutting its budget deficit forecast.

Finance Minister Pravin Gordhan urged ratings agencies that have downgraded Pretoria's credit over the past year to take note of its fiscal prudence, but analysts were concerned that an interim budget he presented to parliament offered no concrete measures to spur growth.

"We are running a sustainable fiscal ship," Gordhan told reporters before his speech to lawmakers, in which he sought to allay fears of populist spending ahead of elections next year.

"Hopefully the ratings agencies will do their homework and recognise that in a very turbulent environment...we actually are keeping a fairly good 19-year record of good fiscal management."

The Treasury cut 2013 growth expectations to 2.1 percent of GDP from 2.7 percent forecast in February, suggesting prospects of a near-term cut in the country's stubbornly high unemployment rate are slim.

Widespread labour strikes and power supply constraints have this year hit the continent's largest economy, which languished in recession in 2009.

Despite the gloomier growth outlook, the government also cut the budget deficit forecast for the year to March 2014 to 4.2 percent of GDP from 4.6 percent, citing lower spending and technical effects from changes to how it calculates the fiscal balance. Economists polled by Reuters had expected 4.9 percent.

The technical alteration and its unexpectedly positive impact on the deficit forecast would be "the major talking point" from the budget, Tradition Analytics said in a note.

Spending for 2013/14 was set at 1.14 trillion rand, rising to 1.24 trillion rand in 2014/15 and 1.44 trillion by 2016/17.

The Treasury said it would strike a balance between keeping the deficit in check while supporting growth along the lines of the National Development Plan, pouring money into health, education, infrastructure, and social assistance to the poor.

"The level of expenditure remains well contained, while the fiscal stance avoids a premature consolidation that could jeopardise higher economic growth, which is required to create jobs," it said.

The rand gained against the dollar to 9.7700 from 9.8135 before Gordhan started his speech, while bonds recovered from session lows on news of the lower deficit forecast.

The rand has fallen nearly 16 percent this year, helping push inflation above the top end of a 3-6 percent target.

This has prevented the central bank from cutting interest rates to spur demand since a 50 basis point cut in July 2012.

The bank had been "very supportive" to growth in its stance and monetary and fiscal policies had been properly coordinated, Gordhan told Reuters on Wednesday, adding a dip in inflation to 6.0 percent in September from 6.4 percent was "a good sign".

MISSING THE BIG IDEA

Analysts reacted positively to the deficit headlines, but said weak growth and a high wage bill would remain a concern for ratings agencies, while the budget was devoid of big ideas to move the economy up a gear.

"While some effort is made to commit to an overall spending ceiling, and some re-prioritisation of expenditure is planned, these are piecemeal efforts," said Standard Chartered economist Razia Khan.

"Anyone hoping for a bolder effort to arrest medium-term deterioration will be disappointed."

Weak growth in Europe, a major trading partner, has dampened demand for South African exports and made it difficult for the private sector to create much-needed jobs.

"Labour disputes, electricity shortages and other supply-side disruptions have weighed down business and consumer confidence, and lowered demand for goods and services," the Treasury said.

Economic recovery over the next three years could increase employment by 1.7 percent a year, but this would be too little to make a major dent in a 25 percent joblessness rate.

Both the private and public sectors have been under pressure from frequent labour unrest, which has resulted in above-inflation wage settlements of 7.9 percent in the first half of this year from 7.6 percent in 2012.

The Treasury anticipates inflation at below its 6 percent upper-limit target in the next three years, but weakness in the rand poses a risk to that forecast.

The current account deficit, long a source of vulnerability for the currency during spates of global risk aversion, was projected to remain above 6 percent of GDP over the medium term as savings lag investments.

$1 = 9.7438 South African rand

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