CAPE TOWN (Reuters) - South Africa's austere budget, aimed at avoiding credit rating downgrades, failed to reassure investors and the rand fell more than 3 percent against the dollar while government bond yields soared.
The package of spending cuts, civil service job freezes and moderate tax hikes on property sales, fuel, alcohol and capital gains may not go down well with voters either ahead of municipal elections this year in which the ruling African National Congress faces a stiff challenge from the opposition.
The mining industry, hit hard by slowing demand from China, is shedding jobs by the thousand while the worst drought in a century has forced Africa's top grain producer to import maize.
Ratings agencies have said they might cut South African debt to junk status after President Jacob Zuma changed finance ministers twice in less than a week in December, raising questions about Pretoria's commitment to prudent fiscal policy.
Finance Minister Pravin Gordhan told parliament that tax hikes should help raise an additional 18.1 billion rand in revenue in 2016/17 and the economy may expand just 0.9 percent, down from a previous forecast of 1.7 percent and compared with estimated growth estimate of 1.3 percent in 2015.
That would be the lowest rate of growth since South Africa emerged from recession in 2009.
Growth has now fallen behind the rate of population increase, resulting in declining per capita incomes, the National Treasury said in a budget statement outlining spending plans for the next three years.
"We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we can ignite growth and generate more revenue, we have to be tough on ourselves," Gordhan said.
Despite weaker growth, the government would still aim to reduce its budget deficit to 3.2 percent of GDP in the next fiscal year from 3.9 percent in the 2015/16 period by tightening spending, he said.
The Treasury said it had cut government departments’ budgets for non-essential services, would borrow $4.5 billion from global markets over the next three years, and seek a minority equity partner after merging two of its state-owned airlines.
Gordhan told Reuters in an interview that he had done "more than enough" to avert ratings downgrades.
But markets tumbled after his speech with the rand off sharply and government bond yields soaring.
"The question is: was it enough to stave off a rating downgrade to junk bond status in the coming months? We think probably not, and the steep exchange rate depreciation shortly after the budget was released suggests that the market agrees," NKC African Economics economist, Bart Stemmet, said.
Moody's said measures needed to cut the deficits predicted for 2017/18 and 2018/19 had not yet been identified and growth forecasts were still slightly more optimistic than Moody’s own predictions of 0.5 prcent for 2016 and 1.5 percent for 2017.
Fitch said growth over the next two years would be depressed by drought, fiscal and monetary tightening.
Fitch and Standard & Poor's have South Africa on BBB-, a notch above junk, and Moody's are on Baa2, two notches above.
The Treasury said a credit downgrade to sub-investment grade, or "junk" status, could trigger a sharp reversal of capital flows and precipitate recession.
"In such an event, aggressive austerity measures would likely be required to restore public finances to a sustainable position," it said.
(Additional reporting by Wendell Roelf in Cape Town and Mfuneko Toyana in Johannesburg; Editing by James Macharia and Louise Ireland)
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