South African economy looks gloom with cuts in growth forecast and Budget surplus

Forecasted budget surpluses may also be in danger as higher borrowing costs increase the price tag of a massive infrastructure programme, and cooling consumer spending eats into tax coffers.

But he is not expected to announce major policy shifts, after the government vowed to hold its course, despite new, more left leaning, leaders in the ruling ANC and government.

Manuel will unveil at 1200 GMT on Tuesday the Treasury’s Medium Term Budget Policy Statement — that gives three year spending plans and updates economic forecasts — amid a severe global financial crisis and fears of a looming world recession.

Recession in rich countries will hit exports and limit capital inflows, exposing a gaping current account deficit.

The rand has lost more than 30 percent of its value against the dollar this year, with extraordinary volatility making financial planning difficult.

The currency plunged up to 17 percent, a record one-day fall, on Wednesday, while stock markets have regularly seen daily moves of more than 5 percent.

"It’s a bit like plotting a course for a kayak in a major North Atlantic storm," said Econometrix economist Tony Twine.

While advanced economies could fall into recession, South Africa’s economy has held up relatively well, but growth is not expected to reach the average 5 percent of the past four years.

Manuel will likely cut the 4 percent predicted for 2008 in his February budget, following electricity shortages earlier in this year, the global downturn, and as consumers cut back on spending due to the strain of high interest rates.

Economists say growth should come in between 3.5 and 4 percent this year before slowing further towards 3 percent in 2009, lower from the Treasury’s previous prediction of 4.2 percent.


The slower growth will impact on revenue assumptions, putting the budget surplus at risk.

"As far as growth is concerned, we do feel it will slow into the new year and that will affect revenue, so pressure on the budget will increase," Citadel economist Salomi Odendaal said.

A bigger state wage bill, due to record high inflation, will add to spending.

"But the positive thing in the whole budget picture is that it is coming from a position of strength," she said, adding 2008/09 may yet show a small surplus before the balance dips into deficit next year.

The Treasury had forecast a surplus of 0.8 percent of GDP this financial year and 0.6 percent of GDP in 2009/10.

Big infrastructure spending to build stadia for the 2010 Soccer World Cup, and to upgrade the transport system will likely now cost more due to higher financing costs.

Power utility Eskom may struggle to source funding for its five-year 343 billion rand expansion programme due to tight international capital markets, possibly prompting more help from the government.

The Treasury has already pledged 60 billion rand in support over 3 years.

"With the way retail sales are falling, a lot of the expenditure taxes that form part of the revenue side may not materialise (and) if government keeps spending, that could wipe out the surplus," Econometrix’s Twine said.

Exchange controls, which over years helped insulate local banks from the toxic debt that felled U.S. and European banks, may stay, but the "medium term budget" should spell out how inflation targeting will work next year under a revised basket.

New weightings will change the way housing costs are calculated, making the targeted CPIX gauge — which strips out mortgage costs — superfluous.

Manuel has hinted that CPIX will fall away, to be replaced as the targeted measure by all-items consumer inflation.

CPIX has remained outside the central bank’s 3 to 6 percent target range since April last year, and hit a record 13.6 percent year-on-year in August, despite rate hikes.

He is not likely to cede to a trade union demand that the inflation targeting framework be scrapped, or announce any other big policy shifts.

"I am not aware of any tactical change in the wind," Twine said.