South Africa's New Budget Aims to Repair Zuma's Economic Damage -- Update

02/21/18 01:52 PM EST
By Gabriele Steinhauser 

JOHANNESBURG -- President Cyril Ramaphosa faced his first major test as his government presented a budget that seeks to repair the economic damage wrought under his predecessor while reassuring international investors and South Africa's poor black majority.

The budget is a mix of tax increases that will help fund free higher education for poor and middle-class students and spending cuts aimed at shoring up the country's credit rating. It comes a week after Mr. Ramaphosa took office after his predecessor, Jacob Zuma, resigned amid pressure from a series of corruption scandals.

The budget underscored some of the challenges for Mr. Ramaphosa. The government nudged its economic-growth forecast higher, but the expansion may not keep pace with a growing population, meaning the average South African is getting poorer.

Mr. Ramaphosa must also balance the need to maintain the unity of his party, the African National Congress, with pressure to remove Zuma appointees in his cabinet, including Finance Minister Malusi Gigaba, who presented the budget on Wednesday.

Mr. Ramaphosa, a former union leader turned multimillionaire, narrowly beat Mr. Zuma's ex-wife in an ANC leadership contest last year and has moved quickly to press his more liberal economic vision on the ruling party and government.

His hope is to attract investment and reduce a 27% unemployment rate before national elections next year, when the ANC risks losing its absolute majority for the first time since the end of white-minority rule.

The new spending plan contains tax increases for most South Africans, rather than concentrating the burden on the high earners and corporations, which can more easily shift earnings abroad. It lifts the value-added tax to 15% from 14% -- the first such increase in 25 years -- and includes higher levies on fuel, alcohol and tobacco.

In return, the government will cover tuition and living expenses for students from poor and middle-class families attending universities or training colleges, a policy Mr. Gigaba said would cost some 57 billion rand ($4.86 billion) over the next three years.

"This is a tough but hopeful budget," he said.

The budget also points to persistent challenges Mr. Ramaphosa's government faces. Mr. Gigaba said the government believes the economy grew 1% in 2017, up from its previous 0.7% forecast, and will expand 1.5% in 2018, 1.8% in 2019 and 2.1% in 2020.

That is barely in line with population growth and far short of the 3% expansion for 2018 Mr. Ramaphosa had envisaged when he campaigned to become ANC leader last year, and of the 5% growth he had foreseen for the period after 2023.

The tax increases, along with 85 billion rand in spending cuts, will help reduce the deficit to 3.6% of gross domestic product in the 2018-19 fiscal year from a 4.3% forecast for the year ending March 31 and will see government debt peak at 56% of GDP in 2022-23.

In his midterm budget review in October, Mr. Gigaba had said government debt would rise to 61% of GDP by 2022.

The change in the debt forecast could help persuade Moody's Investors Service -- the only ratings firm that still deems South Africa's bonds as investment grade -- to forgo a possible downgrade in March. S&P Global Ratings and Fitch Ratings both cut the country's credit rating to junk status last year, following Mr. Zuma's decision to oust Mr. Gigaba's predecessor, Pravin Gordhan.

Many analysts expect Mr. Gigaba may soon be removed as finance minister. The 46-year-old has been accused by opposition parties and civil-society groups of helping members of the wealthy Gupta family -- close friends of the former president -- gain South African citizenship when he was home-affairs minister and of appointing executives at state companies that gave the family lucrative contracts when he was minister of public enterprises. Mr. Gigaba has denied wrongdoing.

Write to Gabriele Steinhauser at


(END) Dow Jones Newswires

February 21, 2018 13:52 ET (18:52 GMT)

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