South Africa Budget Gap May Grow to 4.5% on Less Tax, Bank Says

JOHANNESBURG (Capital Markets in Africa) – South Africa’s budget deficit could swell to more than what the government forecast in February as tax revenue falls short of expectations, the central bank said.

Tax revenue in the fiscal first quarter that ended June 30 was 13 billion rand ($956 million) behind target, the South African Revenue Service said last month.

Should collection continue to fall short of estimates, it would be more than 40 billion rand, or 4 percent, below the forecast in the February budget, the central bank said in its Monetary Policy Review Wednesday. This would widen the fiscal gap for the year through March 2018 to 4.5 percent of gross domestic product compared with the budget’s of 3.5 percent, it said.

The shortfall “presents a range of unappealing choices,” the South African Reserve Bank said. “Larger spending cuts may further weaken growth, yet the scope for increased taxation is limited. Additional borrowing would take debt ratios close to unsustainable levels and divert even more expenditure into interest payments.”

Weak Growth
The Reserve Bank cut rates in July for the first time in five years after the economy had slipped into a recession. Growth prospects remain bleak, with the central bank forecasting 0.6 percent expansion this year and 1.2 percent in 2018, with risks to the forecasts “slightly to the downside.”

While growth is “above potential” in the euro area, Japan and the U.S., the local outlook as deteriorated, the bank said in the review.

“Something has gone horribly wrong domestically” regarding competitiveness and confidence, Rashad Cassim, the head of the bank’s economic research and statistics department, said at the review’s release in Pretoria, the capital. South Africa must must get its “domestic house in order so we can exploit global growth.”

While pledging to narrow the fiscal deficit and stabilize gross debt over the next three fiscal years, the Treasury in February projected increases in bond issuance as the country’s gross borrowing requirement — the amount need to plug the budget gap and redeem existing debt — rises.

Gross loan debt is forecast at 50.7 percent of GDP this fiscal year, up from 49.4 percent in the previous 12 months but lower than the 51.3 percent estimated in the mid-term budget in October last year. The ratio will rise to 52.3 percent next year and peak at 52.9 percent in fiscal 2019.

The government will provide more information on the fiscal-deficit targets on Oct. 25, when Finance Minister Malusi Gigaba delivers his first medium-term budget policy statement.

Source: Bloomberg Business News