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South Africa Announces Spending Cuts As Fears of Recession Loom

After several years of a weakened economy and slow growth rates, the country's finance minister introduced strong austerity measures and tax hikes in the annual budget speech on Wednesday.
Photo by Mike Hutchings/Reuters

Just before announcing a series of spending cuts, tax hikes, and money-borrowing plans, South Africa's Finance Minister Pravin Gordhan was very clear about the state of the economy. The country, he said, is in the midst of a budget crisis.

With growing fears of credit downgrades from ratings agencies after a year of continuing economic troubles in the African nation, anticipation ran high ahead of Gordhan's annual budget speech in parliament on Wednesday. Speaking at a press conference prior to the address, the minister highlighted the severity of the issue.


"There is no doubt about the fact that we are in crisis," he said.

Once he was face to face with legislators, Gordhan revealed the specifics of the budget plan which include a total spending reduction over three years of 25 billion rand (US$1.6 billion). The government will also implement tax hikes on alcohol, property, and fuel that will bring in an estimated $1.8 billion. Meanwhile public sector employment will be frozen for non-essential positions currently open.

"We cannot spend money we do not have. We cannot borrow beyond our ability to repay," Gordhan told parliament. "Until we can ignite growth and generate more revenue, we have to be tough on ourselves."

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The austerity measures will reportedly bring the national deficit from 3.9 percent down to 3.2 percent of the GDP in South Africa. Gordhan said this year's growth rates would hover around 0.9 percent, compared to initial predictions 1.7 percent. While many had expected budget cuts, following the speech the value of South Africa's currency dipped 2.5 percent.

Later on Wednesday, the National Treasury publicized its intentions to borrow a total of $1 billion in cash this year from world markets, a number that will total $4.5 billion by the end of 2018. The budget plan comes at a crucial time for President Jacob Zuma and his ruling African National Congress party, which will be put to the test in upcoming municipal elections.


Cuts in the budget were largely seen as a measure to prevent future ratings downgrades. Slow growth propelled Moody's to downgrade the government's outlook from stable to negative at the end of 2015, while the country hovers close to junk status for credit ratings with Moody's and other agencies. In a statement on Wednesday, the treasury emphasized the negative effect lowered ratings could have in pushing the country into recession.

"In such an event, aggressive austerity measures would likely be required to restore public finances to a sustainable position," the treasury said.

South African financial experts were not optimistic that the stark budget cuts would inhibit rating agencies from imposing downgrades.

"I expected a much firmer austerity budget," Mohammed Nalla, head of strategic research at Nedbank, told the AFP. "This budget will not be enough to help us avoid a credit downgrade in the near future, but it may have helped us buy a bit of time."

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The country's economy has been weakening over the last several years, particularly in the face of commodity price drops, slow growth in China, and electricity shortages. As the country experiences the worst drought it has seen in its history, the impact on agriculture has forced the country to boost imports. Earlier this month Moody's Senior Vice President and lead analyst for South Africa Kristin Lindow warned that the drought was putting the country at an increased risk of recession.

"The worst drought on record in South Africa is aggravating the ongoing economic slowdown, threatening near-zero growth if not a recession in 2016," she told Reuters.

Last year, the economic issues have stirred up social unrest on several occasions. Unemployment rates, which sit at 25 percent, were blamed for a wave of xenophobic riots that burned through several South African cities in April. The violence saw immigrants attacked and killed, amid growing resentment against the country's 5 million foreigners for perceptions that they are taking away jobs.

In October, the government's attempts to raise tuition fees sparked student protests at universities across the country. The demonstrations lasted for days until Zuma agreed to scrap the plan. Higher education is set to see a boost in funding under Gordhan's budget plan, which set aside more than $2 billion to go towards sectors considered to be a priority.

Reuters contributed to this report.