October 25, 2018 / 11:35 AM / in 24 days

UPDATE 2-South African finance minister calls for debt action to avoid IMF

* Treasury says gross debt to rise in medium term

* Govt faces low tax revenues, high wage bill

* Focus turns to rating agencies reaction (Adds Treasury director general, analysts)

By Mfuneko Toyana

CAPE TOWN, Oct 25 (Reuters) - South Africa must swiftly slash government borrowing if it is to avoid a debt trap that would force it to seek help from the International Monetary Fund, Finance Minister Tito Mboweni said on Thursday.

Africa’s most industrialised economy is mired in recession, and faces revenue shortfalls, ballooning debt, cash-strapped state firms and a rising public wage bill.

The rand and government bonds weakened sharply on Wednesday after Mboweni predicted wider budget deficits and cut growth forecasts in a bleak debut budget policy statement.

“Whether or not you like the IMF, ideologically or practically, it doesn’t matter. When you get into a debt trap that’s where you end up,” Mboweni told lawmakers.

“That low economic scenario has reduced tax revenues. We clearly have a problem.”

Mboweni said he doubted that the government would find an investor to take an equity stake in struggling state-run South African Airways (SAA).

“I doubt you are going to find an equity partner who will come into SAA in this current state. As an equity partner you’d have to immediately assume debt of some 21 billion rand ($1.5 billion),” Mboweni said.

The Treasury expects government’s gross debt to stabilise at 59.6 percent of GDP by 2023/24 from an estimated 55.8 percent in the current 2018/19 fiscal year. Tax revenue is expected to underperform significantly in the three years to 2020/21, due to low growth and higher value-added tax refunds.

Treasury Director General Dondo Mogajane told lawmakers approaching the IMF should be avoided “at all costs” as it would involve tough structural adjustments.

“We don’t want to be there (IMF). We think that by doing some basic things, these are low hanging fruits, we will be able to get growth going,” Mogajane said.

RECESSION

The Treasury halved the growth forecast for 2018 to 0.7 percent after the economy slipped into recession in the first half of the year.

President Cyril Ramaphosa has made reviving economic growth a priority since taking office in February, but he has been frustrated by severe fiscal constraints.

Ramaphosa will court investors at a three-day investment summit starting on Thursday, where he will be looking for new pledges to meet his target of $100 billion of new investments over the next five years.

Analysts say ratings agencies are likely to take a dim view of the Treasury’s latest budget projections.

Moody’s - the last of the “big three” agencies to have South Africa at an investment grade rating of Baa3, with a stable outlook - is expected to review the sovereign’s rating in the coming weeks.

Mogajane said he had spoken with all three major credit ratings agencies to clarify elements of the medium-term budget.

“Even if South Africa were to avoid junk status for now the rating outlook would no doubt be downgraded,” Commerzbank analysts wrote in a note.

S&P Global Ratings and Fitch already rate South Africa’s debt as “junk” status. (Additional reporting and writing by Olivia Kumwenda-Mtambo; Editing by James Macharia and Jon Boyle)

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