Twin deficits to bother a minister

Slowing revenue growth and rising spending pose a headache for the finance minister before the Budget later this month, but a depressed global economy poses something resembling a migraine as it brings a twin deficit problem to the forefront.

National Health Insurance stands out as the number one concern on the spending side, with research this week predicting it could amount to more debt for the government.

The recent green paper on the issue suggested spending is likely to increase by 150% on health care. It can only mean more borrowing as Treasury has already used switch auctions and cash reserves to make up the difference between spending and borrowing of more than 5%.

Spending patterns so far suggest a deficit of well over -5% of GDP.

"We hypothesise that initially government borrowing may have to rise until such time as national insurance contributions can be levied on corporates and individuals," said the Bank of America Merrill Lynch research this week.

The research says the tax take for health could rise to 2% of GDP and they expect the budget deficit to reach -5.2% in 2012.

A white paper on the issue is due in February (or March) and funding details will be the most important issue to unpack as there are very flimsy funding details at the moment.

But rising debt is a major concern as it comes at a time when ratings downgrades are only a few steps away - SA is on a precarious ratings watch negative.

It also not possible for SA to meet its growing socio-economic needs without enough revenue streams, while higher borrowing needs to be paid back at higher rates. With low rates on offer overseas, don't be surprised to see another international bond being announced as these have been successful, including even Eskom's foray in this direction (and they are building new stations).

But the current account also poses a problem - effectively the country's cheque book with the rest of the world - as while it is under control now, as economic activity picks up, this could widen.

Bank of America Merrill Lynch is not concerned about that happening now - albeit that financing of the -3.8% current account deficit is reliant on "fickle" international portfolio money chasing quick bucks - but only in 2013.

They only expect 2.5% GDP growth this year (which will lead to a low revenue take), but don't discount it rising to 4% soon after as government infrastructure spend takes off. But therein lies the rub - this could widen the current account deficit as imports get boosted and Eskom expands supply. Watch it go upwards of -4.5% of GDP then.

A weaker rand is needed to keep the current account deficit under control - but some predictions are that the carry trade (yield chasing by foreigners) could see the rand as low as 6.50 to the dollar this year!

The minister is in a tough position, especially with the ratings agencies breathing down his neck. He will have to drop his previous 3.4% GDP prediction for this year, while the future Budget and current account deficit projections - into 2014 - will be the most keenly monitored part of the Budget. A debt to GDP of over 40% and higher borrowing will not go down well at all.

Over to you minister - it's going to be your toughest Budget balancing act yet, but if SA gets some policy planning right, a downgrade can certainly be avoided.