October 30, 2019 / 1:11 PM / 14 days ago

UPDATE 2-South Africa sees budget deficit and debt soaring as economy flags

* 2019/20 budget deficit seen at 5.9% of GDP

* Economic growth forecast for 2019 cut to 0.5%

* Gross debt seen rising, Mboweni warns of debt trap (Adds more details, analysts comments)

By Olivia Kumwenda-Mtambo, Wendell Roelf and Mfuneko Toyana

CAPE TOWN, Oct 30 (Reuters) - South Africa’s budget deficit will rise to a nearly two-decade high and its gross debt is set to soar as a weak economy leads to revenue shortfalls while bailouts for state-owned companies strain public finances, the Treasury said on Wednesday.

The Treasury also slashed its economic growth forecast for this year to 0.5% from 1.5%.

After a downturn in the first half of 2018 when the agricultural sector contracted, the economy has struggled to regain momentum, contracting in the first quarter of the year before recovering in the second quarter.

“This is a serious position to be in,” Finance Minister Tito Mboweni told lawmakers, adding that difficult decisions had to be made to help stabilise debt, including cuts to spending and a public wage bill that has risen by two-thirds in the last decade.

In a medium-term budget policy statement (MTBPS), the Treasury said the budget deficit was likely to reach 5.9% of gross domestic product this fiscal year, which runs from April 2019 to March 2020, far above a previous estimate of 4.5%. The projected deficit would be the highest since 2009/10.

It is then expected to widen further, to 6.5% in 2020/21, the highest level since the Treasury started presenting the consolidated fiscal framework in 2002/03.

Gross government debt was projected to rise from an estimated 60.8% of GDP in the current fiscal year to 71.3% in 2022/23, the Treasury said.

“The consequence of not acting now would be gravely negative for South Africa,” Mboweni said told parliament. “Over time, the country would likely face mounting debt service costs and higher interest rates and may enter a debt trap.”

The rand weakened more than 2% against the dollar, while government bond yields rose, with market participants sceptical that officials would follow through with lowering the public wage bill amid opposition over job cuts from labour unions and key allies of the governing African National Congress party.

“With unemployment already up at an all-time high, I’m not sure how they’re going to get more people not to work and cut salaries. I’m not too sure where they’re going to get their spending cuts from,” said Wichard Cilliers, chief trader at TreasuryOne.

ESKOM REFORM

John Ashbourne, Senior Emerging Markets Economist at Capital Economics, said the MTBPS was “a painful admission that South Africa clearly faces a slowly unfolding fiscal crisis.”

Robust economic growth in South Africa hinges on saving power firm Eskom, which is drowning in 440 billion rand ($29.3 billion) of debt and struggling to keep the lights on as its creaking fleet of coal-fired plants buckle.

The finance minister said new cash flow support for state power utility Eskom would no longer be in the form of equity but loans.

The government has pledged to give Eskom more than 100 billion rand over the next two fiscal years, with additional aid spread over the next decade.

“Once I am convinced that the Eskom board and management has made an irrevocable commitment to implement government’s decisions and there is enough progress, we will negotiate appropriate size of debt relief,” Mboweni said.

A government paper showed on Tuesday that South Africa planned a sweeping overhaul of its power sector by breaking up Eskom over the next three years and opening the industry up to more competition.

The utility unleashed a bout of nationwide blackouts earlier this month. This followed repeated power cuts in February and March, which dragged the economy into contraction and raised the likelihood of the country losing its last investment-grade credit rating from Moody’s.

Moody’s is due to announce a ratings decision on Friday.

Treasury said the risk of a sovereign credit downgrade had risen due to low growth and high debt.

Treasury Director-General Dondo Mogajane said he could not speculate on the outcome of Moody’s upcoming review.

“They might say we didn’t go far enough, especially with the cuts in the state-owned enterprises budgets, because those are unsustainable moving forward,” Mogajane told Reuters.

$1 = 14.9949 rand Additional reporting by Naledi Mashishi; Writing by Olivia Kumwenda-Mtambo; Editing by Catherine Evans and Pravin Char

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