October 16, 2018 / 9:07 AM / 9 months ago

UPDATE 2-South Africa's Treasury says recession, falling revenue hurt public finances

* Contraction in revenues putting stress on government

* Moody’s to release review after next week’s budget (Adds treasury official’s comments on ratings, analyst)

By Wendell Roelf

CAPE TOWN, Oct 16 (Reuters) - Falling revenues and a recession mean South Africa will struggle to finance the public services that form the largest part of its budget, the National Treasury said on Tuesday.

Africa’s most industrialised economy slipped into recession in the second quarter for the first time in nearly a decade and faced political uncertainty that caused turmoil in its currency and financial markets over its finance minister.

Next week’s medium term budget, to be delivered by the new finance minister, Tito Mboweni, will be closely watched for details of President Cyril Ramaphosa’s stimulus plan to pull the economy out of recession and avoid further ratings downgrades.

“The contraction of our public finances is placing tremendous stress on us and our ability to finance public services and this threatens the affordability of planned expenditure,” Treasury’s Director-General Dondo Mogajane told a parliamentary committee.

National debt is approaching 2.5 trillion rand ($175 billion), with debt seen at 60 percent of gross domestic product in 2020, as debts of state firms, particularly Eskom, increase rapidly while tax revenues plummet.

The Treasury has also warned of a shortfall in revenue collection in the current fiscal year after a 50.8 million gap in 2017/18, the financial year ended in March.

President Ramaphosa announced a multi-billion-dollar stimulus programme on Friday, earmarking funds for job creation and infrastructure development as he seeks to make good on a pledge to revive the country’s ailing economy. And while his appointment of Mboweni as the country’s fourth finance minister in two years, replacing Nhlanhla Nene, was well received by investors, there are still doubts over his ability to deliver growth.

“The MTBPS will be calm on the surface but hide some furious ‘kicking’ below the surface to hold the line against revenue underperformance and the political pressures for a ‘real’ stimulus,” said analyst Peter Attard Montalto of Intellidex.

Moody’s, the last of the top three agencies to still rate the country investment grade, said in September that while it did not expect to downgrade the country to junk status, the size of the plan announced by Ramaphosa would have little impact. Mogajane said the expects Moody’s to release its ratings review after next week’s medium term budget policy statement. The agency did not publish the review on Friday as was widely expected.

$1 = 14.2951 rand Writing by Mfuneko Toyana; editing by James Macharia, Larry King

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