(Bloomberg) -- With three months to go before elections, South Africa’s finance minister delivered a budget that provided for vote-grabbing spending increases and a plan to contain debt that cheered investors. 

Nurses, teachers and policemen, many of whom belong to labor unions allied to the ruling African National Congress, will be among the primary beneficiaries of Enoch Godongwana’s largesse. So too will millions of welfare recipients who’ll receive monthly stipends for at least another two years.

The loosening of the public purse strings after several years of budget cuts is a boon for the ANC. The party that’s dominated South African politics since apartheid ended three decades ago has bled support as a result of its failure to tackle crippling power cuts, logistics constraints and rampant poverty and joblessness.

Official data released Tuesday put the unemployment rate at 32%  — and at 41% if those who are too discouraged to look for work are included.

Inadequate Growth

The budget is aimed at growing the economy because “the size of the pie is not growing fast enough to meet our developmental needs,” Godongwana said in his speech to lawmakers in Cape Town on Wednesday.

The economy is expected to growth by an average of 1.6% annually over the next three years, marginally higher than forecast in the November budget update, and an additional 45.6 billion rand ($2.5 billion) in tax revenue is anticipated, providing the scope to spend more.  

The ANC will unveil its campaign manifesto in the eastern KwaZulu-Natal province on Saturday. While President Cyril Ramaphosa is adamant his party will win the May 29 election outright, a series of opinion polls show it will lose its outright majority and it’ll be forced into a coalition with smaller rivals if it wants to continue governing Africa’s most-industrialized economy. 

Godongwana’s concession to investors was a reduction in the deficit and government borrowing for the next three years. He did that by tapping 150 billion rand in paper profits on its gold and foreign exchange reserves, while postponing painful reforms that are needed to stabilize the state’s finances longer term. 

“The government will drag its feet in addressing South Africa’s weak fiscal position until after the vote and build its campaign around the recently extended social welfare package,” said Aleix Montana, Africa Analyst at risk intelligence company Verisk Maplecroft. “Austerity measures will become increasingly likely after the polls because of South Africa’s sizable budget deficit and high debt levels.”

The drawdown will be made from the Gold and Foreign Exchange Contingency Reserve Account, which is administered by the central bank, had a balance of 507.3 billion rand as of last month — a massive increase from the 1.8 billion rand in 2006 that reflects the South African currency’s slump in value against the dollar.  

Oxford Economics Africa described the valuation gains as “fiscal godsend,” which would help improve the nation’s fiscal ratios and mitigate risk by reducing borrowing. The rand gained as much as 0.8% against the dollar after the budget speech, while local bond yields dropped.

The Congress of South African Trade Union, the country’s largest labor group and a member of the ruling alliance, said that while it supported the decision to utilize the reserves, the budget was “underwhelming.” 

The Treasury treated the budget “as little more than a bean-counting exercise and failed to seize the moment to respond decisively to the myriad challenges workers, society, the economy and the state are facing,” it said. “The reason we are in a crisis is because the economy is not growing and unemployment remains dangerously high. The growth in debt is a symptom, not a cause, of this.”

--With assistance from Ntando Thukwana.

©2024 Bloomberg L.P.