Slow pace of reform plunges South Africa into the red
South Africa’s economy has taken a turn for the worse. Finance Minister Tito Mboweni conceded as much in his medium-term budget policy statement (MTBS) on Wednesday.
The national treasury revised down economic growth for 2019 to 0.5%, from the 1.5% forecast in the main budget in February. In addition, the tax revenue shortfall plunged deeper into the red to R53bn ($351m).
The budget deficit in the current fiscal year is 5.9%, while the consolidated figure over the medium term is 6.2%. The greater the deficit, the more the South African government will have to borrow to finance its operational needs.
Government debt is expected to rise to more than R3trn in the current fiscal year. It is anticipated to exceed R4.5trn in the next three years (the medium term). That will bring the debt-to-GDP ratio to 71.3% in 2022-23.
Risks to South African economic growth
Mboweni tabled the MTBPS in parliament on Wednesday, a day after Statistics South Africa (Stats SA) released the results of the Labour Force Survey, which measures formal employment rates.
The Stats SA data showed the official unemployment rate has risen to 29.1%, the worst recorded in the democratic era. It is close to outcomes last documented in the aftermath of the global recession that began in 2008.
The finance minister’s presentation titled “Growth, Sustainability and Renewal” rendered a frank assessment of both the structural and the policy failures which continue to trip up the economy.
Weaker total investment, a slowdown in exports and constrained global growth also contributed to South Africa’s deteriorating economy and fiscal outlook.
The long-term fiscal projections were especially dire and warranted “tough decisions and conversations”, Mboweni told journalists during a pre-MTBPS briefing earlier on Wednesday. During the briefing, Mboweni, the national treasury director-general, South African Revenue Service (SARS) commissioner Edward Kieswetter and Reserve Bank governor Lesetja Kganyago each give their perspectives on the MTBPS.
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No reform, no reward
The structural and the policy factors that compounded the country’s woes included:
- Policy uncertainty.
- Electricity supply shocks.
- Lower levels of investment.
- Inefficient state-owned entities (SOE) investments.
- Poor education outcomes.
“Relative competitiveness declined because of slower implementation of reforms than peers,” reads a segment of the MTBPS presentation.
This is an admission the deep-level structural reforms required to move South Africa’s economic needle forward have not taken place at the scale, pace and depth needed.
Furthermore, the piecemeal reforms undertaken by the government have not had the desired effects or outcomes. This is most pronounced in the state wage bill, which has ballooned and is the biggest line item of government expenditure.
Wage bill wager
“Faith Muthambi and Richard Baloyi put us in this mess. They signed [wage] agreements [with public servants] outside of the mandate. And one of them has been made an ambassador. We must call a spade a spade and not a spoon,” Mboweni said at the briefing.
Muthambi is the former minister of public service and administration, tasked with overseeing the public service. Muthambi was also the erstwhile minister of communications. During both her stints as a member of the executive, she courted controversy. She was a member of former president Jacob Zuma’s cabinet and is currently a member of parliament.
Between 2009 and 2011, Baloyi served as minister of public service and administration, also during the Zuma presidency.
“For every R100 in the fiscus, R46 goes towards compensation. We need a conversation with public workers on how, in difficult circumstances, we can moderate the wage bill. We are not saying [we are going to cut] civil servant numbers. The level of wage is an issue,” Mboweni told journalists.
In the interim, Mboweni has banned members of the executive from travelling business class domestically. Economy class, the minister decreed, will be the standard for domestic trips. However, “we can’t decide for parliament” he conceded.
“We would appeal to the leadership of parliament to follow suit. Nothing compels public representatives to use SAA [South African Airways], they can shop around [for a good deal],” he said.
Drivers of revenue shortfall
The revenue shortfall correlated with the poor employment outlook, reduced corporate profitability in a tough trading environment and weak household consumption.
SARS commissioner Kieswetter agreed, saying: “Revenue collection is a function of the quality of the economy.” He also identified retrenchments, retirements and pension reform as having had an effect on the tax agency’s ability to collect.
SARS’ ability to collect revenue was suboptimal. The focus is now on compliance and on improving the receiver of revenue’s investigative capabilities. This formed part of efforts by the tax agency “to reclaim its space”, said Kieswetter.
Dealing with the debt trap
Since the global financial crisis, the government has run a deficit. But the government had to confront head-on the risks to the fiscal framework, including the rising debt-to-GDP ratio.
“This is starting to reach unsustainable levels. Once it gets to 60%, we should be worried. The optimum level is 30% or 0%. The Reserve Bank Governor prefers it at 0%. It is a serious matter to attend to,” urged Mboweni.
The sweet fiscal spot for South Africa would have been a R250bn reduction in expenditure to get the debt-to-GPD ratio to 60%. Stabilising debt-to-GDP requires “prudent and decisive action”, said the finance minister.
Between now and February, the minister said the government would adopt and explore expenditure-reduction measures, including:
- Negotiating wages
- Dealing with wastage, which occurred in the form of perks and general corruption
The national treasury, he said, would start a conversation with the department of public enterprises about which SOEs should remain in state hands and which should not. “We are going to sell some assets, but we won’t tell you which ones. When in trouble, you rebalance your portfolio,” said Mboweni.
By way of example, SAA has a 3% shareholding in SA Airlink. “Maybe the time has come for us to consider selling or closing South African Express, which would be an interesting case study.” SAA owns South African Express.
Other measures include the national treasury creating a dedicated liquidity facility for all SOEs. It could manage funds appropriated through parliament.
“This will enable us to differentiate an equity injection from the shareholder and a loan advance,” the minister explained.
Mboweni declared the days of SOEs taking begging bowls to the national treasury and receiving no- strings-attached financial assistance were “over”. Through the liquidity facility, SOEs would be granted loans that they had to repay.
On the global front, the South African economy faced downside risks from the “trade war initiated by the US against China, climate change issues and uncertainties and possible difficulties brought about by Brexit” explained Mboweni.
Asked if it was prudent to table the type of MTBPS he did, given the scheduled reviews of South Africa’s sovereign credit ratings, Mboweni responded: “Ratings agencies understand the difficulties we are facing.”
Governor Kganyago said the outcomes of a rating assessment were in the hands of policymakers. But “we should not wait for Father Christmas [to take meaningful policy action]”, he warned.
A rating decision was the culmination of an assessment of the government’s policy choices. It was also an assessment of a government’s fiscal stance and its metrics, as well as its institutional strength, explained the governor.
A sovereign credit ratings downgrade would increase South Africa’s risk premium, cautioned Kganyago. Should such an eventuality occur, the country could “fall out of investment-grade bond indices. [That would result in] capital outflows”. On the other hand, the country could also experience an inflow of speculative-grade bond investors.
The common thread is heightened risk. One of those risks would be the repricing of South African assets globally. If such an occurrence was mainly felt in the exchange rate, South African bond yields would go up, so would debt-servicing costs. “[That would leave the] national treasury with less money to allocate to other areas of spending,” said Kganyago.
The long-term costs of capital would rise. That would mean “all of us paying more to borrow… and GDP would be affected via the investment channel”. In short, a sovereign credit ratings downgrade of South Africa “would be a shock”.
Inflation would go up, which would spark a response from monetary authorities. “Higher inflation means less money for households to spend,” said Kganyago. “The tough decisions are in the hands of policymakers, not monetary authorities.”