UPDATE 2-Recession-bound South Africa sees wider budget deficits, low growth; rand dips

Finance Minister Tito Mboweni acknowledged the challenge he faces at a time revenue shortfalls as he presented his medium-term budget policy statement after just two weeks in the position.

South Africa predicted wider budget deficits and cut growth forecasts in a bleak budget on Wednesday that focused spending on infrastructure, manufacturing and agriculture to boost the recession-bound economy.

Finance Minister Tito Mboweni acknowledged the challenge he faces at a time revenue shortfalls as he presented his medium-term budget policy statement after just two weeks in the position.

"We are trying to make the best out of a difficult situation," he told reporters before making his budget speech in parliament.

Africa's most industrialised economy is struggling with ballooning debt that risks pushing its sovereign credit ratings deeper into "junk" territory. Cash-strapped state firms and high public wages have also strained government finances, putting in jeopardy plans to reduce a stubbornly high unemployment rate before national elections next year.

The Treasury estimated the budget deficit would widen to 4 per cent of South African gross domestic product in the 2018/19 fiscal year from 3.6 per cent forecast previously, and then rise to a 4.2 per cent in the next two years. It also halved the growth forecast for this calendar year to 0.7 per cent.

In the three years to 2020/21, the tax revenue is expected to underperform significantly, it added. South Africa's fiscal year runs from April to March.

The rand which was half a per cent stronger before Mboweni's budget speech, turned weaker, falling 1 per cent. Government debt prices also fell, pushing the yield on the benchmark bond due in 2026 up 6.5 basis points to 9.230 per cent.

'TOUGH MESSAGE'

The government's gross loan debt is expected to stabilise at 59.6 per cent of GDP by 2023/24 from an estimated 55.8 per cent in the current year, the Treasury said. These estimates are likely to be viewed as negative for South Africa's credit ratings before a possible Moody's review.

Moody's is the only one of the "big three" agencies to rate South Africa at investment grade. South Africa is rated "junk" by S&P Global Ratings and Fitch.

"Without meaningful structural economic reform to get this economy growing again the Treasury is going to find itself in a very difficult spot come the February budget," Jeffrey Schultz, an economist at BNP Paribas, said. "I think the risk of ratings downgrades next year is still a very real possibility."

Sanlam Private Wealth director Greg Katzenellenbogen said: "(Mboweni) had a tougher message for people than we thought and the situation is worse than we thought, especially on revenue collection."

President Cyril Ramaphosa announced a stimulus plan last month that included 50 billion rands ($3.5 billion) of expenditure, a portion of which will be funds shifted from low-performance areas, and some new funding.

The Treasury said it would move 32.4 billion rands in expenditure over the next three years, with nearly half the amount directed to agriculture, infrastructure, clothing and textile incentives and job creation programmes.

Funding of under-performing areas has been reallocated, provisional allocations adjusted and the contingency reserve drawn down to make up for the stimulus cash, the Treasury said.