South Africa's Gordhan sees narrower 2012/13 deficit



South Africa projected a lower-than-expected 2012/13 budget deficit on Wednesday, reassuring bond investors and ratings agencies that the continent's biggest economy is keeping a lid on spending despite huge social pressures and sluggish growth.

Finance Minister Pravin Gordhan said the budget deficit would narrow to 4.6 percent of GDP in the financial year ending March 2013 from a 4.8 percent shortfall in 2011/12.

Economists polled by Reuters had predicted a wider budget deficit of 5.4 percent for 2012/13.

Unveiling a 1.1 trillion rand ($143.03 billion) budget - double the expenditure of a decade ago - the Treasury said an uncertain global growth outlook and the need to rebuild fiscal buffers meant state resources would remain constrained for some time to come.

The National Treasury also said it would introduce two new fixed income and three inflation-linked bonds in 2012/13 to smooth the maturity structure of its debt.

ANALYST COMMENTS:

PETER ATTARD MONTALTO - EMERGING MARKET ANALYST, NOMURA
"The headlines are definately positive and hence the initial market reaction, everyone was surprised that the deficit for the coming year was seen at 4.6 percent.

"What is particularly interesting is that they seem to be targeting a primary balance by the end of the framework period which is very good news.

"However the curve is now steepening and there is doubt in people's minds about the numbers. In particular whilst there were announcements of tax changes for this coming year they result in a net reduction in revenue in the short term, and on the expenditure there is a lot of chopping and changing between diffferent lines of the budget but the fact they see expenditure growth falling back to some 8 percent over the medium run looks politically unsustainable.

"Let's also not forget the risks around NHI, infrastructure and other New Growth Path-related possible policy moves, not to mention any outcome from the ANC conference's this year.

"We know the National Treasury's heart is in the right place with this document but we remain sceptical on if implimentation is going to be possible particularly for infrastructure at parastatal level."

GEORGE GLYNOS - MANAGING DIRECTOR, ETM
"A lot of people will view this as generally positive but my fear is the following: firstly, on the tax relief front, the adjustment in the brackets of 6.3 to 6.5 percent hasn't really kept pace with wage inflation which is probably higher than that, so there is an element of bracket creep. It means that you may find yourself paying proportionally more tax.

"Secondly, as far as the budget deficit reduction is concerned in the future, it's difficult to see those numbers as realistic given the GDP growth projections that they are driven off, especially when the government has been a serial under-spender on the infrastructure projects and plans it has for the future, which are part of the drivers of that GDP growth. So on face value it looks better than what it actually is".

CARMEN NEL - SENIOR ECONOMIST, RMB TREASURY
"It is still a tight budget in a difficult environment but nevertheless it was quite a big surprise the extent to which the National Treasury was able to revise down the budget deficit.

"In terms of the expenditure breakdown, there is a lot of shifting around of resources and they are more actively using the contingency reserve.

"At a headline level, certainly a more bullish budget. They are also being a bit more innovative in terms of tax changes to gain more revenue, but we remain cautious on the longer term around whether government can really cap current expenditure growth particularly the wage bill to around 6 percent average, that it is budgeting for.

"The government debt to GDP ratio remains contained, which is obviously good news, but a lot of proof will be in the pudding as to whether the parastatals will be able deliver on these increased capital expenditure numbers and therefore drive growth."

GINA SCHOEMAN - LEAD ECONOMIST, ABSA CAPITAL
"The numbers presented today are a lot better than the market was expecting. What we see is that there is a much bigger pick-up in revenue expectations while the expenditure has kept pretty much level.

"There is slight increases, really nothing as meaningfull as revenues, and if you look within the budget documents of treasury, you will see the revenue increases pretty much being put down to the tax proposals that they have announced."

COLEN GARROW - ECONOMIST, BRAIT
"The growth forecasts are a bit below forecasts It's a budget which emphasizes spending on infrastructure to guard against the wings of contagion from global disturbances. It also has quite a prudent debt management system. I think on balance it is a budget that is quite conservative, and one which probably the rating agencies are going to endorse.

"I don't think it will prompt any downgrading. I don't think much would change. I think there concern has been the crisis in Europe and its impact on South African growth and the debt number.

"I think the numbers are quite prudent. The environment globally is very sensitive to what is happening to Greece, etcetera. I think debt is under control and if we manage it under 40 percent it would be okay. If it is 60 per cent, we would be talking of a debt trap and we are far from that."

RAZIA KHAN - HEAD OF AFRICA RESEARCH, STANDARD CHARTERED
"The announcement of a much narrower-than-expected budget deficit in this fiscal year and the coming fiscal year and faster fiscal consolidation overall - a return to a 3 percent deficit by 2014/15 - represents overwhelmingly good news.

"In the recent past, following the global economic crisis, the better news was always promised at some point in the future. With the Feb 2012 Budget speech, the good news starts now. The impact of this in re-instating South Africa's conservative fiscal policy credentials should not be underestimated.

"With public debt ratios now expected to peak at 38 percent of GDP, compared with over 40 percent previously, South Africa is clearly on a sustainable fiscal path despite the first-ever trillion rand budget.

"While there will always be some element of longer-term political concern and speculation over the likely influence of this on future fiscal policy, the reality is that on the basis of current fiscal policy - perhaps the most sound basis on which to judge the country - South Africa's stance is difficult to fault.

"Although GDP growth languishes well below the levels needed to make a meaningful difference to poverty, South Africa's starting point in tackling these issues is at least - once again - on a more sound footing.

"Unsurprisingly, bonds have reacted positively to this budget. The challenge now will be to use the evident reinstatement of South Africa's sound fiscal credentials as a springboard for faster growth."

CHRISTIE VILJOEN - ECONOMIST, NKC INDEPENDENT ECONOMISTS
"The planned deficit over the next three years is smaller than most people would have expected. This is largely because the growth in spending has been brought down, which might not be popular with the politicians, but it's good when you look at the rands that you need to collect to spend this kind of money. That was definitely the big surprise.

"The forecasts are conservative, they are safe, the National Treasury is not really going for big numbers that would raise a lot of questions. So it's a good news budget, because it's showing that despite some political pressure the finance department is doing what it can to get our state finances back on track."

MIKE SCHUSSLER - ECONOMIST, ECONOMIST.CO.ZA
"I think the infrastructure side is very very encouraging. I think what I've seen of the tax reforms so far is also very encouraging. It is fairer. Overall, it's a very good budget under difficult circumstances. The fact that the deficits came in lower than expected will be good for the bond market, there's no doubt about that.

"I don't think the ratings agencies will have a rethink (after downgrading the outlook on South Africa's credit rating). They will probably wait a while before they re-think and the bigger issue here is that people are waiting to see how we fund our infrastructure investments. We do run a bit of a risk of state-owned enterprises having to increase their prices way above the rate of inflation to pay for the investments. So, I think the ratings agencies will wait a little bit.

"It's certain that the infrastructure investment will help the economy but what is not certain is what is going to do to the price levels in the economy, that is still a bit of an open-ended question."

MARKET REACTION
Bonds reversed earlier gains as the market was sceptical of the Treasury's deficit targets. The yield on the 2015 bond was at 6.625 percent at 1400 GMT after hitting a session low of 6.58 percent after Gordhan started speaking at 1202 GMT, from 6.655 percent before his speech.

The 2026 yield rose to 8.255 percent from a session low of 8.18 percent and 8.28 percent before the speech.

The rand was trading at 7.7185 against the dollar from 7.7390 beforehand.