25 October 2012
South Africa’s sound institutional framework, built on the foundation of its Constitution, will hold the country in good stead as it faces uncertainty at home and abroad, says Finance Minister Pravin Gordhan.
Presenting his Medium Term Budget Policy Statement in the National Assembly in Cape Town on Thursday, a hopeful Gordhan said the country would stand firm despite slower growth and gloomy economic conditions both domestically and overseas.
SA ‘remains a good investment’
He also reassured investors that South Africa remained a promising investment destination and a country with a bright future, despite recent challenges such as the Marikana shooting in August and the wave of unprotected strikes in the mining sector.
“I am sure that all South Africans will identify with this intent and agree that our country is a better place than it was in 1994,” Gordhan said.
“Yet we still have to work harder to achieve economic wellbeing for all. This is a long-term project. Every step of the way, we will do our utmost to broaden public service delivery and expand participation in our economy.”
While the country had held four successful national elections and had a judiciary that pursued its mandate with vigour, a free media and support from civil society played a key role in keeping the country informed to make its own choices, the minister said.
Measures to improve confidence
Amid slower domestic growth, a widening budget deficit and lower tax receipts, the government would undertake a number of measures to improve confidence in the economy and broaden participation, Gordhan told Parliament.
These included re-establishing orderly labour relations, improving living conditions for miners, investing in strategic infrastructure programmes, strengthening municipal finances, promoting special economic zones (SEZs), accelerating youth employment opportunities, shifting exports towards emerging markets and providing support to small businesses.
Added to this, he said, the Presidential Infrastructure Co-ordinating Commission had reviewed the details of 18 strategic infrastructure programmes, which would add to the current R845-billion infrastructure build programmes already in progress.
Business, labour and the government needed to work together to address these challenges.
“As long as there is collective and uncompromising political will, buttressed by an equally strong intent and commitment by all of us, we will overcome the challenges before us.”
Difficult global times
Gordhan said the global economy was undergoing difficult times as it adjusted to an extended period of weaker growth and increased volatility brought on by the 2008-09 global economic crisis.
According to the IMF’s World Economic Outlook ,released earlier this month, advanced and developing countries will experience slow growth over the next few years.
However, global growth is expected to lift from 3.3% this year to 3.6% next year, with advanced countries seeing growth of 1.3% this year and 1.5% in 2013 and developing nations growth of 5.3% and 5.6% respectively.
GDP, budget deficit forecasts
Gordhan said South Africa’s gross domestic product (GDP) was expected to grow by 2.5% this year, down from the 2.7% forecast in the Budget in February. Growth is expected to reach 3.8% in 2014 and increase to 4% by 2015.
The growth in GDP will be supported by the expansion of public sector investment in infrastructure, by new power stations coming on line, improved private sector confidence, strong growth in the southern African region, and relatively low inflation and interest rates (expected to be 5.5% next year).
The budget deficit is expected to widen from 4.2% in 2011/12 to 4.8% in 2012/13, before falling to 4.5% of GDP in 2013/14 and narrowing to 3.1% of GDP by 2015/16.
To fund its shortfall, the government is expected to borrow R165.5-billion in 2012/13 to R173.7-billion in 2013/14, before declining to R151.6-billion in 2015/16.
Much of the current financial year’s borrowing requirements – R146-billion – would be raised through the domestic market.
The government’s total net loan debt and a percentage of GDP is expected to climb from 32.8% for 2011/12 to 35.7% in the coming financial year, and to 39.2% in 2015/16.
Gordhan said higher than anticipated budget deficits had been the result of a weak recovery in tax revenue, rather than uncontrolled increases in non-interest spending.
Tax revenue for 2011/12 has been revised downwards by R5-billion – from R826.4-billion to R821.4-billion – largely with an estimated over R3.9-billion drop in personal income tax and R1.7-billion shortfall in company income tax.
But Gordhan stressed this would still result in an increase of 10.6% tax collected in the current financial year over the 2010/11 year (R742.7-billion).
‘Beware of further downgrades’
However, he added that if economic conditions deteriorated or mining output continued to be disrupted, a further downward revision may be warranted.
He said the risk of a further sovereign rating downgrade needed to be considered, and pointed out that though the impact of recent rating actions on the yield on government debt had been very limited, further downgrades would raise the cost of borrowing.
The National Treasury was also preparing a long-term fiscal report to enhance the policy debate and make explicit implications of new public finance initiatives for future generations, he said.
The budget framework also included a contingency reserve for R4-billion next year, R10-billion in 2014/15 and R30-billion in 2015/16.
“This allows for unforeseeable claims on the fiscus – such as will arise from the recent floods – and future policy considerations,” said Gordhan.
He said South Africa faced difficulties, but that the country was not in terminal crisis.
“Let us set about proving the pessimist wrong, working together to fulfill our vision for a strong, prosperous and united South Africa,” he said.