S. Africa sees lower growth, wider budget gap
S. Africa sees lower growth, wider budget gap
In his three-year budget tabled to parliament yesterday, Finance Minister Pravin Gordhan said the budget gap for the financial year beginning in April would widen slightly to 4.6 percent of GDP from the 4.5 percent forecast in October last year.
However, the deficit is slightly narrower than the 4.7 percent predicted by economists polled by Reuters earlier this week, and the 5.2 percent gap projected for 2012/13.
The shortfall was partly to due reduced 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 in Africa's biggest economy.
Tax revenue for the current year ending in March would likely be 16.3 billion rand ($ 1.84 billion) below projections. In 2013/14 and 2014/15 it is expected to underperform by 13.2 billion rand and 27.8 billion rand respectively.
Gordhan cut the growth forecast for this year to 2.7 percent from the 3.0 percent earlier seen, partly due to subdued demand from South Africa's key markets in Europe.
Growth expectations for the next two years have also been cut, with 3.5 percent seen for 2014 and 3.8 percent expected in 2015, far below the 7 percent growth the government says is needed to create a significant number of jobs.
"Weak external demand among South Africa's traditional trading partners has affected exports, particularly for manufactured goods," the Treasury said.
Domestic consumer demand, which accounts for about 60 percent of GDP, would remain modest as households struggle to find jobs while existing debt levels remain high.
Growth is also likely lag that of South Africa's peers in the BRICS group of leading emerging market economies, with China expecting to expand by 8.2 percent in 2013, while GDP in India is seen rising 5.9 percent and Brazil by 3.5 percent.
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.
"The deficit is there because of the revenue loss that we have experienced, not because of expenditure," the finance minister stressed at a news conference before his speech to parliament.
But President Jacob Zuma's government, which has faced a series of protests against poor basic services in impoverished townships, would continue pouring money into infrastructure, education and health services, he added.
"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 countries such as Greece.
The current account would remain under pressure, averaging a 6.2 percent deficit over the next three years and putting pressure on the rand exchange rate.
The rand weakened to 8.88 against the dollar from 8.835 before Gordhan began his address to parliament and was still around that level at 1336 GMT.
Government bonds weakened, with the yield on the benchmark 2026 paper jumping to 7.31 percent from 7.235 percent beforehand.
Gulf companies challenged by debt and rising interest rates
- Debt restructurings on the rise, but below crisis levels
- Central Bank of the UAE has raised interest rates four times since last March
There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.
Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”