Presenting South Africa's third budget of President Jacob Zuma's administration, finance minister Pravin Gordhan said spending would exceed revenues by 153 billion rand ($19.9 billion), or 4.6 percent of gross domestic product (GDP).

Bonds rose amid initial optimism at the narrower forecast, although reversed those gains as analysts digested the details and grew sceptical about the economy's ability to hit the deficit target.

The yield on the 2026 bond went up to 8.26 percent, after hitting a session low of 8.18 percent shortly after Gordhan started speaking in parliament. The rand was barely changed at 7.728 to the dollar from 7.7390 prior to the speech.

The shortfall is a slight improvement on 4.8 percent in this financial year but sharply lower than the 5.4 percent economists had been expecting, given a push by leftist factions of the ruling African National Congress (ANC) to boost the safety net for South Africa's legions of poor.

"South Africa's finances are in good shape," Gordhan told parliament in Cape Town, in a thinly veiled dig at the two ratings agencies that have cut their credit outlooks in the last three months, mainly due to fears about the effects of a slowdown in Europe and the United States.

After the loss of a million jobs in a 2009 recession, a third of South Africa's 50 million people are on some form of benefits, and Gordhan alluded to political tension over the budget, thanking cabinet members for their support "even when further haircuts have been proposed".

The tightening is unlikely to go down so well on the streets or in some parts of the ANC as the former anti-apartheid liberation movement marches towards internal elections at the end of the year to appoint a new leader.

"Growth in spending has been brought down, which might not be popular with the politicians," said Christie Viljoen of NKC Independent Economists. "That was definitely the big surprise."

EUROPE WEIGHS
Despite his confidence, the economic crisis in Europe - South Africa's main trading partner - forced Gordhan to cut his economic growth forecast for this year to 2.7 percent from a projection of 3.4 percent outlined in October.

The reduction brings the government into line with the central bank and International Monetary Fund (IMF), but it also shows how far South Africa is from the 7 percent growth deemed necessary to make a dent in unemployment that refuses to drop much below 25 percent.

With weak growth hitting tax receipts, Gordhan's options are limited, and his main focus was on moving spending away from the mushrooming public sector wage bill to big-ticket infrastructure projects that should ultimately boost growth and jobs.

"On the wage bill, we have to do things differently," he told reporters in a pre-budget briefing. "We cannot carry on as we are."

That strategy shows through in a projected pick-up in growth over the next three years, as well as a deficit now forecast to narrow to 3 percent of GDP by 2014/15.

The projection is well within the realms of fiscal sustainability, but sits in marked contrast to the two years of budget surplus that South Africa ran in the two years leading up to the global financial crisis.

Gordhan also said total public debt should stabilise at 38.5 percent of output by 2015 - a ratio that debt-laden rich countries, especially in Europe, can only dream of.

In the budget fine-print, the Treasury said it would introduce five new bonds over the next 12 months to diversify the national debt structure.

Two of the bonds will carry fixed returns, while three will be linked to inflation, and maturities will go out to 39 years.