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South Africa's President to Reduce Salaries of Public Sector Workers

South Africa's President Cyril Ramaphosa

South African President Cyril Ramaphosa ascended to the office with the support of labour unions. On Wednesday, his government set the stage for a showdown with them after his finance minister unveiled a plan to dramatically slash public sector wages to rein in the country's rising debt.

Finance Minister Tito Mboweni's pledge to cut 160.2 billion rands ($10.5bn) from the wage bill over the next three years came as his ministry forecast the budget deficit would hit 6.8 percent of the gross domestic product (GDP) in the fiscal year beginning in April - the highest in 18 years.

Mboweni said the government would negotiate with unions on how the wage cuts could be achieved. But one public sector group said on Wednesday it would "shut down government indefinitely" if Mboweni announced even a freeze on wages - a less bold course of action than the one he proposed.

The pay cut promise did give a boost to South Africa's currency, the rand, as traders bet it could help the continent's most industrialised economy escape a painful downgrade of its last investment-grade credit rating, from Moody's.

Mboweni said in an annual budget speech to parliament that South Africa was determined to rein in the deficit within the three-year budget framework and expressed hope that Moody's would grant another reprieve at its next review, due in March.

"I don't think they will rerate us. I am positive they may give us a bit of a 'klap' which we will absorb. But I don't think they will do anything untoward," Mboweni told a news conference, using an Afrikaans word for a slap.

Fitch and S&P Global Ratings already assign the country's sovereign debt "junk" status. Losing its last investment-grade rating could trigger a selloff of bonds worth billions of rands, sending already high government borrowing costs further into the stratosphere.

South Africa has struggled to emerge from a deep economic slump in the two years since Ramaphosa became president with the promise of sweeping reforms. And the pressure has built for his government to take corrective action.

Rolling blackouts have suppressed business activity and eaten into economic growth which the treasury now expects to reach only 0.9 percent this year- less than a previously forecast and far below the level required to make a meaningful dent in unemployment and poverty.

Roughly one-third of South Africans are out of work.

Gustavo Medeiros at Ashmore Group, an emerging markets investment manager, said cutting the wage bill had not been priced in, and would be taken positively by financial markets.

"The public sector is way too bloated," he added.


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