South Africa is to put its 15-year-old strategy of fiscal prudence to the test after it announced a sharp rise in borrowing to fund vast infrastructure investments aimed at keeping its economy growing through lean years.
By Tom Burgis in Cape Town
Gross government debt will jump by R30bn ($2.8bn, €2.2bn, £1.7bn) over the coming financial year to R606bn, sending the public sector into the red overall. Under a three-year blueprint unveiled by Trevor Manuel, the finance minister, it will rise to R750bn by 2011-12.
Africa’s biggest economy would expand by 3.7 per cent this year, Mr Manuel predicted – lower than the 4 per cent he forecast in February’s budget – before slowing further to 3 per cent next year, he said.
That will hurt tax receipts, meaning that Mr Manuel’s much-vaunted budget surplus – achieved for the first time in South Africa’s troubled history last year – will evaporate, becoming a deficit of 1.6 per cent of gross domestic product by 2010.
Global economic cycles meant that policymakers faced a “nasty tendency to boom and bust”, said the veteran minister. “Whether you can smooth out the gyrations is the test of the quality of fiscal policy.”
Having been cautious during the boom in demand for the nation’s abundant commodities, the government could now afford to give the economy a boost, he said.
The government plans to build roads, railways and ports in an effort to attract investment and cut high unemployment, and is also preparing the country to host the 2010 football World Cup. It also hopes that its R600bn, three-year infrastructure programme will compensate for cash-strapped households. Squeezed by 12 per cent interest rates and inflation of 13.6 per cent, debt-laden consumers have reined in their spending.
Nazmeera Moola, a macro-strategist at Macquarie First South, said: “What they are doing is justifying the prudent, counter-cyclical policies of previous years. Yes, they are going into deficits, but so is most of the world.”
The treasury’s hand has been forced in part by the need to finance the recovery of Eskom, the battered state power group. But Mr Manuel stopped short of offering blanket credit guarantees to state-owned enterprises.
Officials said they were adjusting their borrowing plans to try to raise a greater portion at home and less abroad. Pandemonium in the credit markets has widened the spread between the rate at which South Africa can borrow over that at which the US does from 65 basis points 12 months ago to “north of 400” now.
Mr Manuel moved to counter calls from the ruling alliance’s left wing to relax the central bank’s aggressive inflation-targeting mandate, saying the 3-6 per cent target would remain the “anchor” of monetary policy.
Jeff Gable, head of research at Absa Capital, said: “The markets will enjoy this reprieve from changes to the inflation target. But they will look suspiciously at the increase in the borrowing requirement.”