World Economy

South Africa Economy in Crisis

South Africa Economy in CrisisSouth Africa Economy in Crisis

The South African economy is ‘in crisis’ says the country’s finance minister Pravin Gordhan.

The comments came ahead of his budget speech, in which he cut the country’s growth forecast for 2016 to 0.9%, down from 1.7%. He conceded the economy is struggling with shrinking growth, 25% unemployment, and widespread poverty, BBC reported.

The South African currency, the rand, which has halved over the past five years, fell as he was speaking.

The measures announced in the budget were aimed at stopping the country falling into recession and to appease the rating agencies who have threatened to downgrade South Africa to junk status.

Gordhan announced government spending cuts, a civil service job freeze and some moderate tax rises. These increases would affect property sales, fuel, sugary drinks, tobacco and capital gains, as well as environmental levies, which are expected to bring in an extra 18 billion rand ($1.18 billion).

He had been expected to announce plans on privatizing state assets—he fell short of that but said the government was looking at the possibility of merging the loss-making national carrier, South African Airways, with the state-owned SA Express airline “with a view to engaging with a potential minority equity partner”.

Privatization has long been resisted by sections of the ruling African National Congress.

He was blunt on his outlook for the country. “We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we ignite growth and generate more revenue, we have to be tough on ourselves.”

Maike Currie, investment director at Fidelity International, said she was unsure if the measures announced will stop the rating agencies cutting their outlook for the country, as they have warned: “There was no increase in VAT, which has remained unchanged at 14% for two decades now, or income tax hike as the finance minister looked to moderate the impact of tax increases on struggling South African households amid a testing economic backdrop.

“Whether this will be enough to appease rating agencies and businesses, however remains to be seen”.

She added that it was interesting that Gordhan had focused on cutting down government spending without enforcing austerity measures on everyday South Africans, such as raising income tax.

The ruling ANC party faces municipal elections later this year and much was riding on this budget to turn the economic situation around. Although the country is rich in mineral resources it has been hit hard by falling commodity prices globally and its farmers have been hit by the worst drought in more than a century.