Hard Choices for Nene as Slow Growth Crimps South Africa Budget

South African Finance Minister Nhlanhla Nene will give more details on plans to help plug a 225-billion rand ($20 billion) funding gap at Eskom, which could include selling some “non-strategic assets,” according to the National Treasury. Photographer: Simon Dawson/Bloomberg

South African Finance Minister Nhlanhla Nene may use his first mid-term budget to announce something the government has been loathe to try for years: selling assets.

Nene will present revised economic-growth and fiscal targets and probably announce plans to sell government investments that may include mobile-phone operator Vodacom Group Ltd. (VOD) to shore up the budget when he speaks from 2 p.m. today in Parliament in Cape Town. Strikes at platinum mines and metals and engineering companies dimmed hopes of meeting February’s 2.7 percent growth target for this year and a 4 percent budget gap in the year through March 2015.

“Nene could announce the complete or partial privatization of some assets, which would mean a smaller liability for government,” Maarten Ackerman, an investment strategist at Citadel Asset Management, said by phone from Cape Town on Oct. 16. “Then, on paper, he would be able to put down numbers which will keep the rating agencies happy.”

The slowest growth since the 2009 recession has put tax revenue under pressure, complicating Nene’s task of narrowing the fiscal shortfall, even as he has vowed to stick to the expenditure ceiling set by his predecessor, Pravin Gordhan.

Standard & Poor’s lowered the sovereign rating to one level above junk in June, citing concerns about rising debt levels and slow economic growth, and put electricity utility Eskom Holdings SOC Ltd. on watch for a cut to non-investment grade a week later. Fitch Ratings Ltd. downgraded the outlook on the nation’s debt to negative.

The yield on benchmark government securities due December 2026 has fallen 24 basis points this year to 8.02 percent.

Funding Gap

Nene will give more details on plans to help plug a 225-billion rand ($20 billion) funding gap at Eskom, which could include selling some “non-strategic assets,” according to the National Treasury.

The government is considering selling its 13.9 percent stake in Vodacom, which is worth about 26 billion rand, four people with knowledge of the matter told Bloomberg. The government has also set up a task team to look at the future of the loss-making South African Airways.

South Africa’s last major asset sale was in March 2003, when it sold 25 percent of telecommunications company Telkom South Africa Ltd. for 3.9 billion rand. The government still owns 39.7 percent of Telkom.

Gordhan said in February that while the government isn’t opposed to using marginal assets to generate income, privatization is “not a philosophy we believe in.”

Debt Reduction

“A simple clean-up of the peripheral assets could yield quite a bit and it’s one way of bolstering the numbers,” Kevin Lings, an economist at Stanlib Asset Management, said by phone from Johannesburg on Oct. 20. “I don’t think it would be enough to change the entire feel around the fiscal and debt position, but it would allow us to keep government debt below the critical 50 percent of gross domestic product.”

Gordhan set up a committee last year to review the nation’s tax system. Nene said on Oct. 14 there are areas where the government hasn’t “closed the tax gap completely.”

The Treasury announces tax changes in its main annual budget. Higher tax rates may add to the strain on consumers who face rising interest rates as the central bank battles to contain inflation spurred by a weaker currency. The rand has fallen 24 percent against the dollar since the start of last year, the most of 16 major currencies tracked by Bloomberg.

‘Broader Tax’

“The idea of seeing higher and broader tax has been around for a while,” Christie Viljoen, an economist at NKC Independent Economists, said by phone from Paarl outside Cape Town. “It would be best if they give a signal that they are announcing something specific in February.”

Adding to the pressure on Nene is a demand from civil servants for a 15 percent pay increase, more than double the inflation rate. That outstrips the budgeted average 6.4 percent advance in the government’s wage bill for the next three years. Nene has said the government will delay some spending to help curb the deficit.

Cutting back on infrastructure spending would be unwise, Jac Laubscher, chief economist at Sanlam Ltd., said by phone from Cape Town.

“What they have to do is cut current expenditure, that’s where the problem lies,” he said. “It is politically difficult. If you are caught between a rock and a hard place, the options are not the same as when you have complete freedom.”

Source: BloombergBusinessweek