UPDATE 1-South Africa to raise VAT for first time in 25 years to plug budget hole

hole@ (Adds Gigaba quotes, market reaction, details)

CAPE TOWN, Feb 21 (Reuters) - South Africa will increase value added tax (VAT) for the first time in over two decades, the Treasury said on Wednesday, as new President Cyril Ramaphosa's government aims to cut the budget deficit and stabilise debt after years of slow economic growth.

Unchanged since 1993, VAT would increase to 15 percent from 14 percent effective April 1, the Treasury said in a document laying out its budget plans for the next three years.

Ramaphosa took over as leader of South Africa last week after Jacob Zuma stepped down on orders of the ruling African National Congress, bringing to an end nine years of corruption scandals and economic mismanagement. Zuma has denied all wrongdoing.

The rand extended gains to 0.81 percent against the dollar, government bonds firmed, while retail shares on the stock exchange fell as Finance Minister Malusi Gigaba read his budget speech.

A VAT hike ran the risk of adding a heavy financial burden on the poor ahead of elections next year, but Gigaba said poor households would be cushioned through a zero-rating of basic food items such as maize meal and beans.

"This is a tough, but hopeful budget," Gigaba said. "We decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances."

The Treasury said the budget deficit is seen narrowing to 3.5 percent of gross domestic product (GDP) by 2020 from 4.3 percent in the 2017/18 fiscal year. (Reporting by Olivia Kumwenda-Mtambo, Mfuneko Toyana, Wendell Roelf and Alexander Winning; Editing by James Macharia)