South Africa\u2019s\u00a0plan to cut spending and raise taxes to stave off further debt downgrades may have unintended consequences – stunting the economic growth that ratings companies are demanding.<\/p>\n
President Jacob Zuma told his Presidential Fiscal Committee to cut spending by R25 billion ($1.8 billion) in next year\u2019s budget and to find ways to add R15 billion to the nation\u2019s revenue. These may include tax increases.<\/p>\n
While these measures are aimed at\u00a0staving off further ratings cuts, they could damp expansion in an economy that went through its second recession in less a decade this year. Slow growth lies at the heart of the government\u2019s fiscal problems, S&P Global Ratings and Moody\u2019s Investors Service said.<\/p>\n
\u201cAny increases in taxes right now are certainly going to have a damping effect on whatever growth prospects the economy might have,\u201d George Herman, chief investment officer at Citadel Investment Services in Cape Town, said by phone.<\/p>\n
Political uncertainty\u00a0and conflict in the ruling party in the run-up to its leadership election next month has hamstrung efforts to boost growth in Africa\u2019s most-industrialized economy. Zuma\u2019s changes to his cabinet in March, in which he fired Pravin Gordhan as finance minister, caused the nation to lose its investment-grade status with two ratings companies for the first time in 17 years.<\/p>\n
\u201cWe are looking for around 1% growth next year out the South Africa economy, and clearly that would assume no significant taxes,\u201d Kevin Lings, chief economist at Stanlib Asset Management Ltd. in Johannesburg, said by phone. \u201cThe trick here is going to be, what are other initiatives they announce that will lead to growth, and that will become the key question next year.\u201d<\/p>\n
Finance Minister Malusi Gigaba painted a bleak picture of the nation\u2019s finances in his mid-term budget last month, estimating a revenue shortfall of 50.8 billion rand for the 2018 fiscal year projecting that government debt would exceed 60% of gross domestic product by 2022. The economic impact of further expenditure cuts or tax hikes could be counter-productive, he said.<\/p>\n
On November 24 S&P lowered the nation\u2019s rand debt to junk and cut the foreign-currency rating to two levels below investment grade. Moody\u2019s put its assessments on review for a downgrade in the next 90 days.<\/p>\n
Gigaba will present details of the planned spending cuts and revenue increases in the 2018 budget on February 21. While Moody\u2019s said it may not conclude its review until the size and the composition of the fiscal plan is known, ratings companies will also monitor the results of the African National Congress\u2019s leadership election, which is widely seen as a head-to-head contest between Zuma\u2019s ex-wife and former African Union Commission chairwoman, Nkosazana Dlamini-Zuma, and Deputy President Cyril Ramaphosa.<\/p>\n
The ratings companies may see Zuma\u2019s plan as positive for the economy if it\u2019s executed \u201cbut I don\u2019t think it really holds a lot of weight for them unless implemented for the longer term,\u201d Russell Lamberti, a chief strategist at ETM Investment Services in Cape Town, said by phone<\/p>\n
\u201cThese are very short-sighted and very short-term solutions,\u201d he said. \u201cIt doesn\u2019t solve our fundamental problem, which is the ongoing growth in the size of expenditure over time.\u201d<\/p>\n