South Africa cuts deficit

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South African Finance minister Pravin Gordhan on Friday cut the 2010/11 budget deficit and said this year’s growth might be higher than previously forecast, suggesting further future reductions in the fiscal deficit.

Widening fiscal deficits had caused some concern among some investors about the long-term debt sustainability in Africa’s biggest economy, and saw bond yields rising after the February budget especially on the long end.

Gordhan said the budget gap for the year ended March 31 was 5,0% of GDP, slightly lower than the initial forecast of 5,3%, due to higher-than-expected tax collection.

This year’s budget deficit is also 5,3% of output, narrowing to 4,8% in 2012/13.

The South African Revenue Service (SARS) collected R674.2 billion ($99,61 billion), slightly more than the target of R672,2 billion, Gordhan said.

“The remarkable performance that SARS is reporting indicates that our economy is recovering,” Gordhan said.

Asked whether the better-than-expected revenue for 2010/11 might also apply to the next fiscal year, he said: “There are good indications that South Africa’s economy might grow faster than we believe,” adding the budget deficit could therefore be revised.

The bond market firmed after Gordhan’s announcement, with the 2015 bond yield falling to 7,775% from 7,82% and the 2026 yield down to 8,90% from 8,95% prior.

In his budget in February, Gordhan said the economy was expected to grow by 3,4% for 2011, rising to 4,4% by 2013.

Gordhan said was still unclear whether higher international oil prices would undermine economic growth.

South Africa’s GDP forecasts are still a fraction of the 7% growth the government has said is needed to make a dent in unemployment, currently more than half the adult population.

A separate survey on Friday showed that although the manufacturing sector, the second biggest contributor to GDP, was on the mend it was still struggling to create jobs.

The Purchasing Managers’ Index (PMI) climbed to a 13-month high of 57,2 in March but the employment index was below 50.

“There is normally a good relationship between the PMI reading and the manufacturing data. If the relationship holds, manufacturing activity should continue to improve in the first half of 2011,” said Kevin Lings, economist at Stanlib.