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UPDATE 3-South African budget deficit expected to reach eight-year high
October 25, 2017 / 12:43 PM / in a month

UPDATE 3-South African budget deficit expected to reach eight-year high

* 2017/18 budget deficit seen at 4.3 pct of GDP

* 2017 economic growth forecast cut to 0.7 pct

* Gigaba says period ahead not an easy one

* Rand, government bonds slump (Adds analysts comments, student protests)

By Olivia Kumwenda-Mtambo

CAPE TOWN, Oct 25 (Reuters) - South Africa raised its estimate for this year’s budget deficit on Wednesday, saying the country faces sluggish economic growth, shortfalls in revenue and costly bailouts of struggling state-owned companies.

In its medium-term budget policy statement, the Treasury said the deficit was likely to reach 4.3 percent of gross domestic product in the 2017/18 fiscal year, which began in April. It had previously estimated a deficit of 3.1 percent.

The projected deficit would be the highest since 2009. Economists polled by Reuters had forecast 3.9 percent.

“The period ahead is not going to be an easy one,” Finance Minister Malusi Gigaba said in his budget speech to parliament. “Following several years of expenditure restraint, further budget cuts will involve hard choices and difficult compromises.”

The rand fell to its lowest in 10 months against the dollar in response and bonds weakened. South Africa’s sovereign dollar bonds also fell.

“More worrying for markets, however, was the minister’s admission that the deficit will remain essentially stable over the coming three years,” Capital Economics Africa economist John Ashbourne said.

“Previous budgets have always included the optimistic prediction that things will improve later in the forecast period.”

The Treasury also lowered its forecast for this year’s economic growth, to 0.7 percent from an earlier estimate of 1.3 percent. Since a 2009 recession, growth has fallen short of the government’s target of 5.4 percent, the level economists say is needed to curb unemployment, which stands at 27.7 percent.

Weak growth has stymied the government’s ability to generate revenue and lower its gross debt, which is expected to rise by nearly 1 trillion rand in the next three years, to 59.7 percent of GDP.

The economic gloom is compounded by allegations of corruption in state-owned companies and claims of influence-peddling in government that have hurt investor confidence.

Political uncertainty is growing before an African National Congress conference in December. The conference will elect a new party leader to succeed President Jacob Zuma, who is battling several scandals, including corruption allegations.

The poor budget numbers came as hundreds of university students marched to Parliament on Wednesday, clashing with police, as they demanded free higher education. Weeks of protests for free education last year led to several universities closing temporarily.

BAILOUTS, NUCLEAR

Credit downgrades have put off investors, and the Treasury warned that capital outflows could destabilise the economy. S&P Global Ratings and Moody’s are scheduled to review South Africa in November. Fitch has not published its review calendar for South Africa.

The rating agencies won’t like the policy statement, BNP Paribas South Africa economist Jeff Schultz said. “Not enough was done to instil confidence that fiscal consolidation remains front of mind for the Treasury,” Schultz said.

Also worrying are bailouts of state companies - a total of 13.7 billion rand ($984.87 million) to just South African Airways and South African post office. Gigaba said the bailouts threatened the Treasury’s spending ceiling and to avoid a breach it would sell part of its stake in telecoms company Telkom.

Investors are also watching plans by the government to build costly nuclear power plants, which Gigaba said would be considered once the economy recovers.

“Nuclear is not off the agenda,” he said. “The point I have emphasized is that the country and the budget cannot afford it.”

$1 = 13.9104 rand Additional reporting by Mfuneko Toyana and Wendell Roelf; Editing by James Macharia, Larry King

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