GLOBAL ECONOMIC CRISIS PUSHES SOUTH AFRICA INTO BUDGET

UNCLAS PRETORIA 000375 DEPT FOR AF/S; AF/EPS; EB/TPP USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND TREASURY FOR DAN PETERS DEPT PASS USTR FOR WILLIAM JACKSON E.O. 12958: N/A TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF SUBJECT: GLOBAL ECONOMIC CRISIS PUSHES SOUTH AFRICA INTO BUDGET DEFICIT ¶1. Summary. Finance Minister Trevor Manuel announced in his 2009 budget speech that the FY 2010 budget deficit would be 3.9 percent of GDP. To finance the deficit, government debt will increase from 22.6 percent of GDP in FY 2009 to 25.6 percent of GDP in FY 2010. South Africa's short-term economic outlook is clouded by the deterioration in the global economy, with GDP growth expected to slow to 1.2 percent in 2009. The revenue-GDP-ratio will decline from 26.5 in FY 2009 to 26 percent in FY 2010. Social services will receive the biggest slice of the expenditure pie, while spending on infrastructure and public order and safety will remain a priority. End Summary. -------------- Budget Deficit -------------- ¶2. (U) Finance Minister Trevor Manuel announced in his 2009 budget speech, delivered in parliament on February 11, that the government's fiscal deficit in FY 2010 would be 3.9 percent of GDP. Only a year ago, Manuel was budgeting for a fiscal surplus equal to 0.6 percent of GDP for FY 2010. The global economic crisis is primarily to blame for the change in fiscal stance. A surplus of 0.9 percent of GDP was recorded in FY 2008 and a small deficit of 1.0 percent of GDP is expected for FY 2009. -------------- Macro-Economic Outlook -------------- ¶3. (U) Manuel pointed out that after four years of economic growth of more than five percent per year, GDP growth had slowed to 3.1 percent in 2008. Manuel expected growth of 1.2 percent in 2009, the lowest rate since 1998. Household consumption expenditure is expected to decline 0.2 percent in 2009. Growth in private-sector fixed investment, a key driver of economic expansion over the past four years, is expected to slow this year. However, Manuel expects that as the global economy begins to recover towards the end of 2009, and as household consumption benefits from lower inflation and interest rates, growth should increase to 3 percent in 2010 and 4 percent in 2011. He told parliament that a continuing expansion of public-sector fixed investment and benefits flowing from the 2010 FIFA World Cup will also support the recovery. South Africa's current account deficit is expected to narrow to about 6 percent in 2009 due to smaller dividend payments to international investors and lower demand for imports, partly due to the weaker currency. National Treasury forecasts that inflation will decline to an average of 5.8 percent in 2009, 5.3 percent in 2010, and 4.7 percent in 2011. -------------- Budget Ratios -------------- ¶4. (U) The following table summarizes the revenue and expenditure numbers set forth in the budget and provides the key fiscal ratios for the 2008, 2009 and 2010 fiscal years: -------------- -------------- Budget FY 2008 FY 2009 FY 2010 -------------- -------------- Total Revenue R559.77bn R611.12bn R642.99bn Percentage of GDP 27.1 26.5 26.0 Total Expenditure R541.50bn R633.91bn R738.56bn Percentage of GDP 26.2 27.5 29.9 Budget deficit/surplus R18.28bn -R22.78bn -R95.57bn Percentage of GDP 0.9 -1.0 -3.9 -------------- Government Debt -------------- ¶5. (U) To finance the deficits, government debt is set to increase Q5. (U) To finance the deficits, government debt is set to increase from 22.6 percent of GDP in FY 2009 to 25.6 percent of GDP in FY 2010, whereas just four months ago (in the medium-term budget policy statement) it was set to fall to 21.4 percent of GDP in FY 2010. National Treasury expects this trend to continue and projects that the debt-to-GDP ratio will increase to 27.4 percent in FY 2012. Despite this increase, the debt service cost is set to remain stable at about 8.6 percent of the total budget (or 2.5 percent of GDP) over the next three years. National Treasury attributes this stability to lower interest rates and active debt swap and refinancing programs. Comment: Debt service costs have steadily declined since the late 1990s. Since peaking at 5.6 percent of GDP in FY 1999, debt service costs dropped to 2.4 percent of GDP in FY ¶2009. End Comment -------------- Revenue -------------- ¶6. (U) Manuel revised the revenue estimate for FY 2009 and FY 2010 downwards by R14.4 billion and R50 billion, respectively. The National Treasury attributed the lower revenue estimate to slower growth, depressed trade, and declining company profits. As a result, the revenue-GDP-ratio will decline from 26.5 in FY 2009 to 26 percent in FY 2010. -------------- Tax Relief -------------- ¶7. (U) Manuel announced tax relief of R13.6 billion to individual taxpayers in FY 2010, almost double the R7.2 billion given in FY ¶2009. The biggest chunk, almost R9 billion, will compensate taxpayers for wage inflation and bracket creep. Furthermore, Manuel signaled a delay in the introduction of the mining royalties tax regime from April 2009 to April 2010, in effect giving the mining industry tax relief of R1.8 billion. Manuel said this would help to minimize job losses in mining. He also said that the mining sector should not expect this relief to be continued in FY 2011. -------------- Expenditure -------------- ¶8. (U) Total expenditure will increase by almost 10 percent in real terms to 29.9 percent of GDP in FY 2010, with strong growth in social services, infrastructure spending, and social transfers to households. Manuel said that sound fiscal management and prudent policy choices over the past decade had given the government the necessary fiscal space to increase spending. ¶9. (U) Spending on social services (education, health, welfare and housing) will receive the biggest slice of the expenditure pie, accounting for almost half of total expenditure. Comment: The large spending on social services reflects the SAG's heavy emphasis on addressing the socio-economic needs of the poor. End Comment -------------- Education and Health -------------- ¶10. (U) Education continues to account for the biggest single spending item, absorbing almost 18.3 percent of total spending in FY 2009, followed by social protection and health (15.4 percent and 11.0 percent, respectively). The education and health budgets will grow strongly by 10 percent and 9.2 percent respectively in FY 2010. Manuel added R25 billion to the budget for education and health care over the next three years, as well as R4 billion to the school nutrition program. -------------- Social Grants -------------- ¶11. (U) Manuel announced the expansion of the social grants system by increasing the eligible age of the child support grant from 14 to 15 years, revising the means test to cover a larger proportion of households, and lowering the eligible age for men for old age pension to 60 years. The extension of the social grants program is likely to bring an additional two million beneficiaries into the system, and will cost an additional R13 billion over the next three years. Total expenditure on social grants increased from R72.3 billion in FY 2006 to R105.4 billion in FY 2009, an average annual increase of 16.3 percent, and is expected to rise to R140.0 billion in FY 2012. Comment: The SAG's social grants program is set to cover 13.4 million beneficiaries by April 2009, almost 10 million more than a decade ago. Number of people receiving Social Grants -------------- Apr 2005 Apr 2007 Apr 2009 -------------- Old Age 2,093,440 2,195,018 2,324,615 War veterans 3,343 2,340 1,649 Disability 1,307,551 1,422,808 1,404,884 Foster care 252,106 400,503 487,510 Care dependency 88,889 98,631 105,909 Child support 5,661,500 7,863,841 9,061,711 -------------- Total 9,406,829 11,983,141 13,386,278 -------------- End Comment. -------------- Housing -------------- ¶12. (U) Spending on housing has almost doubled since FY 2006 and accounted for 2.1 percent of total spending in FY 2009. The budget for housing will grow by an average of 12 percent annually over the next three years, and account for 2.5 percent of total spending in FY 2012 -------------- Infrastructure Spending -------------- ¶13. (U) Government spending will include a significant expansion in infrastructure investment by the large state-owned enterprises, which plan to spend more than R397 billion over the next three years on power generation, transmission, and distribution, transport hubs, freight rail and pipelines. Furthermore, the general government is expected to spend R390 billion on school building programs, public transport, housing, water, and sanitation over the same period. An ABSA economist told Embassy Economic Specialist that the SAG's infrastructure program will not only strengthen the long-term growth potential of the economy but also lower the cost of economic activity, compensate for lower levels of private investment, and act as part of the broader countercyclical fiscal stimulus. Government Infrastructure Spending -------------- FY2009 FY2010 FY2011 FY2012 -------------- General Gov. R100.4bn R118.3bn R128.1bn R144.2bn Gov. Enterprises R90.2bn R119.6bn R131.3bn R145.8bn -------------- Total R190.6bn R237.9bn R259.4bn R290.0bn -------------- -------------- Public Order and Safety -------------- ¶14. (U) Spending on public order and safety accounted for almost 10.1 percent of total spending in FY 2009 and is set to increase by an average of 10.9 percent annually over the next three years, to account for 10.7 percent of total spending in FY 2012. Manuel allocated a further R5.4 billion to improve the criminal justice system, create an integrated fingerprint and DNA database, improve detective capacity, and increase the number of police officials from 183,000 to over 204,000 by 2012. -------------- Department Savings -------------- ¶15. (U) Manuel asked national departments to make efficiency savings and to discontinue ineffective programs and reduce waste. He indicated that R19 billion was removed from the spending plans tabled in the 2008 Medium Term Budget Policy Statement, reflecting the urgency of eliminating unnecessary expenditure. -------------- DFA Budget Peaks -------------- ¶16. (U) The Department of Foreign Affairs' (DFA) budget has peaked after years of growth in the number of foreign missions. The DFA budget will now drop slightly over the next three years. The decline is due to the conclusion of foreign property acquisitions and the completion of the DFA head office in Pretoria. Comment: South Africa now has 126 foreign missions, a large number for a developing country. End Comment. -------------- SACU Payments -------------- ¶17. (U) The budget shows that payments to South African Customs Union (SACU) countries will decline from R28.9 billion in FY 2009 to QUnion (SACU) countries will decline from R28.9 billion in FY 2009 to R27.9 billion in FY 2010 and R26.2 billion in FY 2011. Comment: This could have a heavy impact on Lesotho and Swaziland, which rely on SACU revenues for much of their government budgets, and a lesser impact on Namibia and Botswana. End Comment -------------- Comment -------------- ¶18. (SBU) As expected, Manuel delivered a moderately expansionary budget, aimed at maintaining infrastructure spending and expanding social programs, without taking on undue levels of debt. Most private sector analysts would reject his GDP growth estimate of 1.2 percent in 2009 as too optimistic. However, there is broad agreement that South Africa will show overall positive growth in 2009, as interest rate cuts, rand weakness, and fiscal stimulus lift the economy out of the contraction that occurred in the fourth quarter of 2008. Obviously, much will depend on the global economy.