/ 21 July 2014

Nene: SA to curb debt growth as economy weakens

Minister of Finance Nhlanhla Nene must take up where Pravin Gordhan left off.
Minister of Finance Nhlanhla Nene must take up where Pravin Gordhan left off.

South African Finance Minister Nhlanhla Nene pledged to curb the growth in public debt as economic growth weakens and global interest rates rise.

While the government is committed to lowering the budget deficit to 2.8% of gross domestic product in the fiscal year ending March 2017 from an estimated 4% this year, a slowdown in economic growth will make it difficult to achieve those goals, Nene told lawmakers in Cape Town on Monday.

Africa’s second-largest economy is struggling amid a series of strikes, curbing revenue growth and prompting Standard & Poor’s to downgrade the nation’s debt. The central bank last week cut its economic growth forecast for this year to 1.7% from 2.1% after a five-month stoppage in the platinum industry caused Gross Domestic Product (GDP) to contract an annualised 0.6% in the first quarter.

“Despite the contained growth in expenditure, government’s budget deficit has remained elevated,” Nene said. “If growth outcomes continue to disappoint, achieving this objective will be much more difficult,” he said, referring to the budget gap targets.

Public debt, which is forecast to swell to 48.3% of GDP in the year through March 2017, is under pressure as policy makers in the US and Europe tighten monetary policy.

“We are entering a new environment — rising global interest rates have increased the cost of servicing our debt,” Nene said. “The fiscal space built up in the 2000s has diminished.”

Downgrade risk
The government is committed to its fiscal path and “if necessary further measures will be taken to achieve our objectives,” he said.

Standard & Poor’s cut South Africa’s credit rating on June 13 by one level to BBB-, on par with Russia and Brazil. Fitch Ratings reduced the outlook on its BBB assessment, the second-lowest investment grade, to negative from stable the same day. Moody’s Investors Services said on July 3 its rating on the nation may be at risk because of a strike by about 220 000 metals and engineering workers, which followed the platinum walkout.

“We will act decisively to avoid further downgrades, as these will result in a significantly higher cost of borrowing, both for government and state-owned companies, and the cost of financing infrastructure programs will increase,” Nene said. – Bloomberg