Confronted by the threat of a credit-rating downgrade, falling tax revenue, rising debt and demands by students to scrap university fees, South African Finance Minister Pravin Gordhan is prioritising reviving a moribund economy. “Growth is our focus,” Gordhan said in an interview in Cape Town on Wednesday, after presenting his mid-term budget update. “We’ve done the homework, we understand the concrete realities. We’ve told the country frankly that if we don’t do anything we could end up in a lower growth scenario with worse consequences for expenditure.”

The growth forecasts were trimmed by 0.4 percentage point for each of the three years through 2018 in the Medium-Term Budget Policy Statement, as sluggish global demand, soft commodity prices and a crippling drought curb output. An expansion of just 0.5% is projected this year, rising to 2% by 2018. That’s well short of the 5.4% the government is targeting to address a 27% unemployment rate. S&P Global Ratings, Fitch Ratings and Moody’s Investors Service are due to review South Africa’s credit rating in the next few months and have said reviving the economy and reining in debt and government spending are key to averting a downgrade. Gordhan, who’s led the nation’s efforts to avoid junk status, has been at loggerheads with President Jacob Zuma over the management of state companies and the national tax agency. The minister has also been charged with fraud for approving the early retirement of a former colleague, adding to political turmoil that’s been highlighted as a rating risk.

Growth story

“The poor growth story is really at the heart of the matter,” Ravi Bhatia, director for sovereign and international public finance ratings at S&P Global Ratings in London, said by phone. “We are still worried about the growth story and whether the growth trajectory is going to improve.” More needs to be done to reassure investors that the government is on the right track and is committed to working with business and labor to revive the economy, according to Gordhan.

“Growth depends on investment, investment depends on confidence, confidence depends on getting this national buy-in that we are talking about,” he said. “We can continue to try and do it as if government can do everything alone, which is impossible.” South Africa will get to a stage of austerity if the economy doesn’t grow, Deputy Finance Minister Mcebisi Jonas said in a speech in Cape Town Thursday. The revised budget provided little new impetus for growth, with the National Treasury announcing plans to raise an extra R43bn ($3.1bn) in taxes and trim the government’s expenditure ceiling by R26bn over the next two years.

Budget cuts

Despite those measures, the Treasury signaled that it will miss its budget deficit targets, as tax revenue falls short of expectations. A fiscal gap of 3.4% of gross domestic product is projected for the current year, and it’s expected to narrow to 2.7% by March 2019. The February budget targeted a deficit of 3.2% this year, 2.8% in fiscal 2018 and 2.4% the year after that. Gross and net debt ratios will peak at higher levels and later than previously forecast.

“I think South Africa can only really avoid a downgrade if the economy accelerates,” John Ashbourne, Africa Economist at Capital Economics in London, said by phone. “If that doesn’t happen, then the only way to keep debt from rising would be really substantial budget cuts, which we didn’t see today and which would be politically very difficult.”

Gordhan pledged an extra R17.6bn over four years to help poor university students — an allocation that’s unlikely to end a wave of protests that have rocked campuses across the country to demand tuition fees be scrapped completely. Police fired rubber bullets, stun grenades and water cannons at a group of protesters who pelted them with bricks and stones outside the parliamentary precinct as Gordhan delivered his budget address.

While spending pressures are likely to remain, Gordhan has signaled that he won’t bow to populist pressures, said Kevin Lings, chief economist at Stanlib Asset Management Ltd. in Johannesburg. Even so, the revised budget “hasn’t done enough to allay concerns from the ratings agencies,” he said by phone. “We would say that a downgrade is on its way. What’s missing is the ability to implement policy measures that get the economy to grow a lot faster.”

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