South African budget to set out 'tough' measures to repair post-Zuma economy

[February 19, 2018]   By Olivia Kumwenda-Mtambo

JOHANNESBURG (Reuters) - South Africa's finance ministry is set to spell out "tough decisions" in its 2018 budget on Wednesday to plug a revenue gap and narrow the deficit, providing an early look at how new President Cyril Ramaphosa plans to repair the ailing economy.

Africa's most industrialized economy, hurt by nine years of mismanagement under the scandal-plagued Jacob Zuma, faces a 50.8 billion rand ($4.36 billion) revenue gap in 2017/18 fiscal year.

Tax hikes, including higher value added tax (VAT), could help plug the shortfall, analysts say.

Finance Minister Malusi Gigaba, whose position is uncertain now amid talk of an imminent reshuffle by Ramaphosa, sent shock waves through financial markets last October when he announced the projected revenue shortfall and flagged weak growth estimates and rising government debt.

Though it remained to be seen whether Gigaba would be the one tabling the budget in parliament on Wednesday, his spokesman indicated there was no stepping back from tough measures which have also been emphasized by Ramaphosa.

"The (October budget) built up a very clear honest picture of the economic environment we are in. What people should expect is some repairing type of interventions taken to restore the books of National Treasury," the spokesman, Mayihlome Tshwete, said when asked what was expected of Wednesday's budget.

He added: "That means tough decisions have to be taken by government ... there is no question we need to address the 50 billion (rand) elephant in the room."

In his maiden state of the nation address on Friday, a day after his election as president by parliament, Ramaphosa also warned of tough decisions to reduce the fiscal deficit and stabilize debt after years of weak growth.

Ramaphosa took over after Zuma stepped down on orders of the ruling African National Congress (ANC) ending nine years of office plagued by corruption allegations and economic mismanagement.

"VAT HIKE POLITICALLY UNPALATABLE"

A Reuters poll last week found that economists were split on how new revenues should be raised - the most popular being an increase in income tax, followed by higher value added tax (VAT), the sale of non-core assets and taxes on specific goods.

Finance Minister Malusi Gigaba speaks to members of the media at Parliament before the State of the Nation Address by South African president Cyril Ramaphosa in Cape Town, February 16, 2018. REUTERS/Sumaya Hisham/File Photo

Economists said a 2 percent VAT hike could be effective in wiping out the 50.8 billion rand revenue shortfall. The VAT rate, currently at 14 percent, has not been adjusted since 1993.

But a VAT hike runs the risk of adding a heavy financial burden to the daily lives of the poor.

"In a low-savings economy, consumption should rather be taxed, but I think a VAT hike is likely to be politically unpalatable ahead of the 2019 national elections in particular," said Standard Bank economist Elna Moolman.

The ANC had been under strong pressure to address high unemployment and inequality after the party lost its grip on cities including Pretoria and Johannesburg during municipal elections in 2016.

South Africa remains polarized by inequality more than two decades after the end of white-minority rule in 1994, with the lion's share of the economy still in the hands of the white minority population.

Rating agencies will also closely monitor the budget after S&P Global Ratings and Fitch downgraded South African debt to "junk" status last year, citing the dismal economic outlook.

Moody's, which rates South African debt on its lowest investment grade rung, placed the country on review for a downgrade. It said it would make a decision after the budget.

"Moody's will need concrete reasons not to deliver a downgrade. The budget will have to deliver enough consolidation to avert such a move," Standard Chartered Bank's Chief Africa Economist Razia Khan said.

A downgrade to "junk" by Moody's could see South African debt lose its place in Citi's World Government Bond Index (WGBI), the biggest of the global benchmarks and tracked by about $2-3 trillion of funds.

($1 = 11.6490 rand)

(Editing by James Macharia and Richard Balmforth)

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