The economy is expected to expand 0.7% this year, down from 1.3% predicted in the February budget.
The economy is expected to expand 0.7% this year, down from 1.3% predicted in the February budget.

South Africa Faces Fears of Downgrade

South Africa Faces Fears of Downgrade

South Africa forecast higher debt and wider fiscal deficits over the next three years, heightening the risk of further credit ratings downgrades as a fight for control of the ruling party limits policy choices. The nation’s currency and bonds weakened.
Finance Minister Malusi Gigaba painted a bleak picture of the state of the country’s finances in his first mid-term budget on Wednesday, with growth and revenue set to fall well short of projections made in February. He warned there was little scope to raise taxes or cut spending, Bloomberg reported.
“It is not in the public interest, nor is it in the interests of government, to sugarcoat the state of our economy and the challenges we are facing,” Gigaba said in a written copy of a speech to lawmakers in Cape Town. “Improving our economic growth outlook over the period ahead remains our biggest challenge.”
The deteriorating debt trajectory threatens to trigger a downgrade of the country’s local-currency debt rating to junk by S&P Global Ratings and Moody’s Investors Service, which could spur massive capital outflows. S&P and Fitch Ratings Ltd. stripped South Africa of its investment-grade foreign-currency assessment in April, citing concerns about policy uncertainty and lackluster growth, just days after Gigaba replaced Pravin Gordhan as finance minister.
If the ratings companies “don’t do anything after today they are frozen behind the wheel,” George Herman, chief investment officer at Citadel Investment Services in Cape Town, said by phone. “The ratings downgrade is now all but guaranteed, it’s just a matter of them saving face and deciding when to do it.”
The rand weakened 1.2% to 13.914 against the dollar in Johannesburg, after earlier slumping to the lowest value this year. The yield on benchmark government bonds due December 2026 jumped 22 basis points to 9.08%.
Efforts to put Africa’s most-industrialized economy back on track have been hamstrung as leaders of the ruling African National Congress wrangle over who will replace President Jacob Zuma as party leader in December.
Zuma’s implication in a succession of scandals, including allegations that he allowed members of the wealthy Gupta family, who are in business with his son, to loot billions of rand from state companies have further dented investor confidence. Zuma and the Guptas deny wrongdoing.
The treasury expects the economy to expand 0.7% this year, down from 1.3% predicted in the February budget, and trimmed its growth forecasts for the next three years. Tax revenue for this fiscal year will fall 50.8 billion rand ($3.7 billion) short of the initial forecast.

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