* Budget deficit seen at 18-year high in 2020/21
* Treasury seeks 160 bln rand in public sector wage cuts
* Trade unions have threatened protests over wages
* Rand lifted as traders bet on Moody’s reprieve (Adds Fitch comment)
By Olivia Kumwenda-Mtambo, Mfuneko Toyana and Wendell Roelf
CAPE TOWN, Feb 26 (Reuters) - South Africa will cut its public sector wage bill to contain a rising budget deficit, Finance Minister Tito Mboweni said on Wednesday, setting the stage for a showdown with trade unions who threatened protests if pay was touched.
Mboweni’s plan to cut roughly 160 billion rand ($10.5 billion) from the wage bill over the next three years came as his ministry forecast the budget deficit would hit 6.8% of GDP in the fiscal year beginning in April, the highest in 18 years.
The pay cut proposal boosted the rand, as traders bet it could help South Africa, the continent’s most industrialised economy, escape a painful downgrade of its last investment-grade credit rating, from Moody’s.
Mboweni said in an annual budget speech to parliament that South Africa was determined to rein in the deficit within the three-year budget framework. He proposed no major tax increases and expressed hope Moody’s would grant another reprieve at its next review, due in March.
“I don’t think they will re-rate us. I am positive they may give us a bit of a ‘klap’ which we will absorb. But I don’t think they will do anything untoward,” Mboweni told a news conference, using an Afrikaans word for a slap.
Fitch and S&P Global Ratings already assign the country’s sovereign debt “junk” status, and losing its last investment-grade rating could trigger a sell-off of billions of rands of bonds, pushing up already high government borrowing costs.
Fitch said in a statement on Wednesday the budget highlighted the “severe deterioration” underway in South Africa’s finances and that the planned cuts to the wage bill could be difficult to achieve given opposition from unions.
“The political scope for making substantial cuts in other areas, should wage savings not materialise, also appears limited,” Fitch said, adding that the budget’s reliance on wage cuts added further risks to South Africa’s deficit and debt trajectories.
South Africa has struggled to emerge from a deep economic slump in the two years since Cyril Ramaphosa became president, promising sweeping reforms. Pressure has built for his government to take corrective action.
The finance ministry now expects economic growth this year of just 0.9%, less than a previous forecast of 1.2% and far below the level required to make a meaningful dent in unemployment and poverty. Roughly one-third of South Africans are out of work.
Gustavo Medeiros at Ashmore Group, an emerging markets investment manager, said cutting the wage bill had not been priced in, and would be taken positively by financial markets.
“The public sector is way too bloated,” he added.
The wage cut proposal raises the risk of a massive public sector strike that could cripple services in hospitals, schools and government offices.
Signalling how unpopular wage cuts are with unions, one public sector group said on Wednesday it would “shut down government indefinitely” if Mboweni announced a pay freeze — a less bold course of action than the one he took.
South Africa’s biggest trade union federation COSATU said it would not allow workers’ wages to be slashed.
Given the expected backlash, some analysts are sceptical Mboweni will be able to follow through, especially since the ruling African National Congress may need its union allies to mobilise support in local elections next year.
“A lot of people are branding this a fairytale budget,” said Bianca Botes at Peregrine Treasury Solutions.
Mboweni said a planned sovereign wealth fund would have a target capitalisation of about 30 billion rand. Funding sources could include proceeds from the allocation of telecommunications spectrum, petroleum, gas or minerals royalties, or the sale of non-core state assets.
He added that a proposed state retail bank would operate on commercial principles. (Reporting by Olivia Kumwenda-Mtambo, Mfuneko Toyana, Wendell Roelf; Additional reporting by Tom Arnold and Karin Strohecker in London; Writing by Alexander Winning; Editing by Joe Bavier, Catherine Evans and Tom Brown)