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Bodhi Ganguli

South Africa Takes Steps to Reduce Budget Deficit as Outlook Dims

by Bodhi Ganguli | Dun & Bradstreet Editor

March 8, 2016 | No Comments »

South Africa’s 2016 budget aims to deliver economic growth through greater public-private partnerships against a backdrop of slowing domestic growth, rising fiscal and current account deficits, a weakening rand, a record drought, and electricity bottlenecks.

The budget is generally business-friendly and keeps the corporate tax rate unchanged; the value-added tax (VAT) rate is also unchanged.

The country is suffering from its worst drought in nearly half a century as rainfall has been drastically cut by El Niño weather patterns. The drought response, coupled with a recent electricity shortage, has exposed a gaping infrastructure deficit. To tackle this, the budget allocates an energy investment of 70 billion South African rand this year, and an additional 180 billion rand over the next three years as construction of the Medupi, Kusile, and Ingula power plants is completed.

Transport and logistics infrastructure also accounts for nearly 292 billion rand in outlays over the next three years. Amendments to bank regulations have also been proposed to facilitate lending for long-term infrastructure investment.

More importantly, the budget takes much-needed steps to reduce South Africa’s problematic budget deficit. The 2016 budget sets deficit targets for the next three years, which are lower than the October Medium Term Budget Policy Statement projections. Spending plans are reduced, a higher revenue target is set, and net national debt is projected to stabilize at 46.2% of GDP in 2017-18, and to decline after that.

For the upcoming 2016-17 fiscal year, the deficit target has been set at 3.2% of GDP, declining to 2.4% by 2018-19. The International Monetary Fund commented that the 2016 budget was “prudent and charted appropriately ambitious targets for the government deficit and debt,” although there has been criticism from others that the deficit reduction plans are not strict enough.

Dun & Bradstreet believes that given the anemic growth environment, the fiscal consolidation plans offer a positive, cautious start. However, the targets must be achieved without slippage to bolster investor confidence.

Both current growth and the near-term outlook remain weak with risks to the downside. Real GDP growth slowed sharply in Q4 2015 to 0.6% year over year from 1.0% in Q3. That brought growth for the whole year 2015 down to 1.3%, the lowest since the Great Recession ended and slightly below the 1.5% pace set in 2014.

The ongoing drought was a big drag on growth. Activity in the agriculture, forestry, and fishing industry contracted 14.0% due to decreases in the production of field crops and forestry. Manufacturing too was a habitual offender, contracting 2.6% in Q4.

Dun & Bradstreet forecasts that the expansion will decelerate further in 2016, with real GDP advancing only 0.9%, the slowest pace of growth since 1998.

The double whammy of slumping growth and simultaneously rising inflation is creating a major policy dilemma for the South African Reserve Bank. Headline CPI inflation jumped a whole point from 5.2% in December 2015 to 6.2% in January 2016, reflecting primarily the impact of the drought. Food price inflation rose from 5.8% to 7.0% over the same period. In addition to reducing GDP and raising prices via its impact on agricultural output, the drought has negative implications for the country’s food security.

The weak rand remains one of the additional sources of upward pressure on domestic inflation. And more recently one of the provisions of the 2016 budget will also add to inflationary pressures in the near term. The budget increased the general fuel levy by 30.5 cents per liter.

Further, the national energy regulator has approved a 9.4% hike in electricity tariffs in 2016-17, which will also show up in consumer prices eventually. Complicating the central bank’s job, core inflation — which excludes volatile food, petrol, and energy prices — has risen from its recent low of 5.1% in November 2015 to 5.5% in January 2016.

Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.


Photo by Flickr user Paul Saad, used here under a Creative Commons license.

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