R 271233Z FEB 09
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC 7508
CIMS NTDB WASHDC
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHINGTON DC

UNCLAS PRETORIA 000375 
 
 
DEPT FOR AF/S; AF/EPS; EB/TPP 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR DAN PETERS 
DEPT PASS USTR FOR WILLIAM JACKSON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: GLOBAL ECONOMIC CRISIS PUSHES SOUTH AFRICA INTO BUDGET 
DEFICIT 
 
¶1. Summary.  Finance Minister Trevor Manuel announced in his 2009 
budget speech that the FY 2010 budget deficit would be 3.9 percent 
of GDP.  To finance the deficit, government debt will increase from 
22.6 percent of GDP in FY 2009 to 25.6 percent of GDP in FY 2010. 
South Africa's short-term economic outlook is clouded by the 
deterioration in the global economy, with GDP growth expected to 
slow to 1.2 percent in 2009.  The revenue-GDP-ratio will decline 
from 26.5 in FY 2009 to 26 percent in FY 2010.  Social services will 
receive the biggest slice of the expenditure pie, while spending on 
infrastructure and public order and safety will remain a priority. 
End Summary. 
 
-------------- 
Budget Deficit 
-------------- 
 
¶2. (U) Finance Minister Trevor Manuel announced in his 2009 budget 
speech, delivered in parliament on February 11, that the 
government's fiscal deficit in FY 2010 would be 3.9 percent of GDP. 
Only a year ago, Manuel was budgeting for a fiscal surplus equal to 
0.6 percent of GDP for FY 2010.  The global economic crisis is 
primarily to blame for the change in fiscal stance.  A surplus of 
0.9 percent of GDP was recorded in FY 2008 and a small deficit of 
1.0 percent of GDP is expected for FY 2009. 
 
---------------------- 
Macro-Economic Outlook 
---------------------- 
 
¶3. (U) Manuel pointed out that after four years of economic growth 
of more than five percent per year, GDP growth had slowed to 3.1 
percent in 2008.  Manuel expected growth of 1.2 percent in 2009, the 
lowest rate since 1998.  Household consumption expenditure is 
expected to decline 0.2 percent in 2009.  Growth in private-sector 
fixed investment, a key driver of economic expansion over the past 
four years, is expected to slow this year.  However, Manuel expects 
that as the global economy begins to recover towards the end of 
2009, and as household consumption benefits from lower inflation and 
interest rates, growth should increase to 3 percent in 2010 and 4 
percent in 2011.  He told parliament that a continuing expansion of 
public-sector fixed investment and benefits flowing from the 2010 
FIFA World Cup will also support the recovery.  South Africa's 
current account deficit is expected to narrow to about 6 percent in 
2009 due to smaller dividend payments to international investors and 
lower demand for imports, partly due to the weaker currency. 
National Treasury forecasts that inflation will decline to an 
average of 5.8 percent in 2009, 5.3 percent in 2010, and 4.7 percent 
in 2011. 
 
------------- 
Budget Ratios 
------------- 
 
¶4. (U) The following table summarizes the revenue and expenditure 
numbers set forth in the budget and provides the key fiscal ratios 
for the 2008, 2009 and 2010 fiscal years: 
 
--------------------------------------------- -------- 
Budget                FY 2008    FY 2009    FY 2010 
--------------------------------------------- -------- 
Total Revenue         R559.77bn  R611.12bn  R642.99bn 
Percentage of GDP        27.1       26.5       26.0 
Total Expenditure     R541.50bn  R633.91bn  R738.56bn 
Percentage of GDP        26.2       27.5       29.9 
Budget deficit/surplus R18.28bn  -R22.78bn  -R95.57bn 
Percentage of GDP         0.9      -1.0       -3.9 
 
--------------- 
Government Debt 
--------------- 
 
¶5. (U) To finance the deficits, government debt is set to increase 
Q5. (U) To finance the deficits, government debt is set to increase 
from 22.6 percent of GDP in FY 2009 to 25.6 percent of GDP in FY 
2010, whereas just four months ago (in the medium-term budget policy 
statement) it was set to fall to 21.4 percent of GDP in FY 2010. 
National Treasury expects this trend to continue and projects that 
the debt-to-GDP ratio will increase to 27.4 percent in FY 2012. 
Despite this increase, the debt service cost is set to remain stable 
at about 8.6 percent of the total budget (or 2.5 percent of GDP) 
over the next three years. National Treasury attributes this 
stability to lower interest rates and active debt swap and 
refinancing programs.  Comment:  Debt service costs have steadily 
declined since the late 1990s.  Since peaking at 5.6 percent of GDP 
in FY 1999, debt service costs dropped to 2.4 percent of GDP in FY 
¶2009.  End Comment 
 
------- 
Revenue 
------- 
 
¶6. (U) Manuel revised the revenue estimate for FY 2009 and FY 2010 
downwards by R14.4 billion and R50 billion, respectively.  The 
National Treasury attributed the lower revenue estimate to slower 
growth, depressed trade, and declining company profits.  As a 
result, the revenue-GDP-ratio will decline from 26.5 in FY 2009 to 
26 percent in FY 2010. 
 
---------- 
Tax Relief 
---------- 
 
¶7. (U) Manuel announced tax relief of R13.6 billion to individual 
taxpayers in FY 2010, almost double the R7.2 billion given in FY 
¶2009.  The biggest chunk, almost R9 billion, will compensate 
taxpayers for wage inflation and bracket creep.  Furthermore, Manuel 
signaled a delay in the introduction of the mining royalties tax 
regime from April 2009 to April 2010, in effect giving the mining 
industry tax relief of R1.8 billion.  Manuel said this would help to 
minimize job losses in mining.  He also said that the mining sector 
should not expect this relief to be continued in FY 2011. 
 
----------- 
Expenditure 
----------- 
 
¶8. (U) Total expenditure will increase by almost 10 percent in real 
terms to 29.9 percent of GDP in FY 2010, with strong growth in 
social services, infrastructure spending, and social transfers to 
households.  Manuel said that sound fiscal management and prudent 
policy choices over the past decade had given the government the 
necessary fiscal space to increase spending. 
 
¶9. (U) Spending on social services (education, health, welfare and 
housing) will receive the biggest slice of the expenditure pie, 
accounting for almost half of total expenditure.  Comment: The large 
spending on social services reflects the SAG's heavy emphasis on 
addressing the socio-economic needs of the poor.  End Comment 
 
-------------------- 
Education and Health 
-------------------- 
 
¶10. (U) Education continues to account for the biggest single 
spending item, absorbing almost 18.3 percent of total spending in FY 
2009, followed by social protection and health (15.4 percent and 
11.0 percent, respectively).  The education and health budgets will 
grow strongly by 10 percent and 9.2 percent respectively in FY 2010. 
 Manuel added R25 billion to the budget for education and health 
care over the next three years, as well as R4 billion to the school 
nutrition program. 
 
------------- 
Social Grants 
------------- 
 
¶11. (U) Manuel announced the expansion of the social grants system 
by increasing the eligible age of the child support grant from 14 to 
15 years, revising the means test to cover a larger proportion of 
households, and lowering the eligible age for men for old age 
pension to 60 years.  The extension of the social grants program is 
likely to bring an additional two million beneficiaries into the 
system, and will cost an additional R13 billion over the next three 
years.  Total expenditure on social grants increased from R72.3 
billion in FY 2006 to R105.4 billion in FY 2009, an average annual 
increase of 16.3 percent, and is expected to rise to R140.0 billion 
in FY 2012.  Comment: The SAG's social grants program is set to 
cover 13.4 million beneficiaries by April 2009, almost 10 million 
more than a decade ago. 
 
Number of people receiving Social Grants 
---------------------------------------- 
 
                 Apr 2005     Apr 2007    Apr 2009 
                  -------------------------------- 
Old Age         2,093,440    2,195,018   2,324,615 
War veterans        3,343        2,340       1,649 
Disability      1,307,551    1,422,808   1,404,884 
Foster care       252,106      400,503     487,510 
Care dependency    88,889       98,631     105,909 
Child support   5,661,500    7,863,841   9,061,711 
                ---------------------------------- 
Total           9,406,829   11,983,141  13,386,278 
                ----------------------------------- 
 
End Comment. 
 
------- 
Housing 
------- 
 
¶12. (U) Spending on housing has almost doubled since FY 2006 and 
accounted for 2.1 percent of total spending in FY 2009.  The budget 
for housing will grow by an average of 12 percent annually over the 
next three years, and account for 2.5 percent of total spending in 
FY 2012 
 
----------------------- 
Infrastructure Spending 
----------------------- 
 
¶13. (U) Government spending will include a significant expansion in 
infrastructure investment by the large state-owned enterprises, 
which plan to spend more than R397 billion over the next three years 
on power generation, transmission, and distribution, transport hubs, 
freight rail and pipelines.  Furthermore, the general government is 
expected to spend R390 billion on school building programs, public 
transport, housing, water, and sanitation over the same period.  An 
ABSA economist told Embassy Economic Specialist that the SAG's 
infrastructure program will not only strengthen the long-term growth 
potential of the economy but also lower the cost of economic 
activity, compensate for lower levels of private investment, and act 
as part of the broader countercyclical fiscal stimulus. 
 
Government Infrastructure Spending 
---------------------------------- 
                   FY2009    FY2010   FY2011    FY2012 
                  -------------------------------------- 
General Gov.      R100.4bn  R118.3bn  R128.1bn  R144.2bn 
Gov. Enterprises   R90.2bn  R119.6bn  R131.3bn  R145.8bn 
                  -------------------------------------- 
Total             R190.6bn  R237.9bn  R259.4bn  R290.0bn 
                  -------------------------------------- 
 
----------------------- 
Public Order and Safety 
----------------------- 
 
¶14. (U) Spending on public order and safety accounted for almost 
10.1 percent of total spending in FY 2009 and is set to increase by 
an average of 10.9 percent annually over the next three years, to 
account for 10.7 percent of total spending in FY 2012.  Manuel 
allocated a further R5.4 billion to improve the criminal justice 
system, create an integrated fingerprint and DNA database, improve 
detective capacity, and increase the number of police officials from 
183,000 to over 204,000 by 2012. 
 
------------------ 
Department Savings 
------------------ 
 
¶15. (U) Manuel asked national departments to make efficiency savings 
and to discontinue ineffective programs and reduce waste.  He 
indicated that R19 billion was removed from the spending plans 
tabled in the 2008 Medium Term Budget Policy Statement, reflecting 
the urgency of eliminating unnecessary expenditure. 
 
--------------- 
DFA Budget Peaks 
---------------- 
 
¶16. (U) The Department of Foreign Affairs' (DFA) budget has peaked 
after years of growth in the number of foreign missions.  The DFA 
budget will now drop slightly over the next three years.  The 
decline is due to the conclusion of foreign property acquisitions 
and the completion of the DFA head office in Pretoria.  Comment: 
South Africa now has 126 foreign missions, a large number for a 
developing country.  End Comment. 
 
------------- 
SACU Payments 
------------- 
 
¶17. (U) The budget shows that payments to South African Customs 
Union (SACU) countries will decline from R28.9 billion in FY 2009 to 
QUnion (SACU) countries will decline from R28.9 billion in FY 2009 to 
R27.9 billion in FY 2010 and R26.2 billion in FY 2011.  Comment: 
This could have a heavy impact on Lesotho and Swaziland, which rely 
on SACU revenues for much of their government budgets, and a lesser 
impact on Namibia and Botswana.  End Comment 
 
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Comment 
------- 
 
¶18.  (SBU) As expected, Manuel delivered a moderately expansionary 
budget, aimed at maintaining infrastructure spending and expanding 
social programs, without taking on undue levels of debt.  Most 
private sector analysts would reject his GDP growth estimate of 1.2 
percent in 2009 as too optimistic.  However, there is broad 
agreement that South Africa will show overall positive growth in 
2009, as interest rate cuts, rand weakness, and fiscal stimulus lift 
the economy out of the contraction that occurred in the fourth 
quarter of 2008.  Obviously, much will depend on the global economy.