CAPE TOWN— Subdued European demand for its exports forced South Africa to cut its 2013 economic growth forecast on Wednesday, while missed revenue targets looked to be creating a wider budget deficit than first thought.
While vowing to keep a lid on overall spending, Finance Minister Pravin Gordhan committed to more social spending for South Africa's poorest, many who live in shanty townships and a are key support base for President Jacob Zuma as he gears up for general elections early next year.
"This government will not get to the point where we impose austerity on our people,'' Gordhan said, alluding to fiscal tightening measures that have triggered violent protests in European countries such as Greece.
In his three-year budget tabled to parliament, Gordhan said the 2013 budget deficit would be 4.6 percent of GDP, a bit larger than his last forecast in October. The deficit is slightly narrower than economists' forecasts, however, and a big decline from the 5.2 percent gap projected for 2012/13.
This year's shortfall was partly due to reduced tax and mineral rights revenue from the mining sector, hit by strikes last year that left more than 50 people dead and shaved 15 billion rand [$1.7 billion] of output from Africa's biggest economy.
South Africa remains the laggard among its peers in the BRICS group of leading emerging market economies, with China expecting growth of 8.2 percent this year, followed by 5.9 percent for India and 3.5 percent in Brazil.
With growth flatlining in Europe, South Africa's main export market, Gordhan was forced to cut this year's growth forecast once again to 2.7 percent - half South Africa's pre-2008 financial crisis average.
The relatively subdued longer-term outlook also means the economy has little chance of making any in-roads into the persistent 25 percent unemployment regarded as the main threat to social stability two decades after the end of apartheid.
"If growth continues along the present trajectory, substantial spending commitments would require significant adjustments in revenue and reductions in other areas of spending,'' said Gordhan.
Domestic consumer demand, which accounts for about 60 percent of GDP, is likely to remain modest as households struggle to find jobs while existing debt levels remain high.
Gordhan said the government, still smarting from credit downgrades from Moody's, Standard & Poor's and Fitch, would keep a tight grip on its purse strings, with plans to reduce spending by 10.4 billion rand [$1.2 billion].
"The deficit is there because of the revenue loss that we have experienced, not because of expenditure," said Gordhan in a news conference before his speech to parliament.
The projected deficits are unlikely to improve South Africa's credit ratings, which now stand slightly above the investment grade cut-off, according to analysts.
"Under the circumstances, [the government] probably struck a reasonable balance given the fiscal constraints and difficult economic circumstances,'' said Renaissance Capital economist Elna Moolman.
"Today's budget was ratings negative - on its own it does not justify further downgrades, but at the same time it also will not allay the concerns of the ratings agencies sufficiently to rule out further downgrades down the line," said Moolman.
Gordhan said the government, which has faced a series of protests against poor basic services in the impoverished townships, would continue pouring money into infrastructure, education and the health service.
Spending on social services, which have risen by 11 percent in the last five years, are expected to increase to 120 billion rand next year, said Gordhan.
The rand weakened after the budget, and was last at 8.8850 against the dollar, from 8.835 before Gordhan began his address.
Government bonds weakened, weighed down by plans to increase issuance to 165 billion rand a year during the next three years. The yield on the benchmark 2026 paper rose nearly 10 basis points to 7.31 percent.