A crisis too good to waste
Finance Minister Tito Mboweni’s upcoming Medium Term Budget Policy Statement (MTBPS) is perhaps the most important for South Africa to date. With a resurgence of load shedding, crisis-level unemployment figures, and economic growth teetering between zero and one percent, government is quickly running out of time and options to address the country’s challenges.
At the time of February’s Budget, real growth in gross domestic product (GDP) was projected at 1.5%, up from 0.8% in 2018. However, the economy unexpectedly shrank by 3.1% in the first quarter of 2019, and although a rebound was recorded in the second quarter, we now expect real GDP growth for the year to come in at an underwhelming 0.6%.
The difference between the forecast and the actual economic growth figure translates into a tax receipt shortfall of some R60 billion for the tax-year ending March 2020. Given that this shortfall is virtually across the board – including the three major categories of personal income tax, corporate income tax and VAT – Mboweni will be hard-pressed to find ways to offset this deficit.
And with Moody’s set to deliver its next assessment directly after the MTBPS, on 1 November, the stakes are incredibly high. Moody’s has given South Africa the benefit of the doubt for a number of years – arguably far too long. If you add South Africa’s 6% budget deficit forecast and state-owned enterprise (SOE) debt obligations to South Africa’s debt-to-GDP number, we are comfortably in sub-investment grade status.
However, although there is enough reason for Moody’s to downgrade South Africa’s investment rating, its most recent comments indicate that it will retain South Africa’s rating for the time being. But if – or even when – this view changes, the implications will be material. A sub-investment grade rating would immediately raise the cost of government debt in an environment where South Africa needs funding. It would also see a significant amount of funds leave the country, translating into a weaker rand, higher interest rates and higher inflation.
South Africa needs to tackle a suite of challenges simultaneously, namely: eliminating corrupt and wasteful government spending; reducing current government spending (read wages); resolving various SOE constraints; and growing the economy in a way that creates jobs and widens the tax base. In the absence of this, National Treasury will remain on the back foot, and will battle to stabilise the country’s finances.
The state’s wage bill has risen steadily over the past few years without the necessary productivity materialising. At Eskom, for instance, there are now twice as many people employed as there were eleven years ago, even though South Africa is producing the same amount of electricity now as it did back in 2008. While the prospect of job losses is a hot-button issue, if South Africa doesn’t reduce the public sector wage bill and resize and reorganise its SOEs now, so that they are stable and sustainable, the unemployment problem will only be exacerbated. The end result could well be that we soon find ourselves cap-in-hand before international credit agencies, who will force us to take the very measures we are currently trying to sidestep.
This said, Mboweni’s draft policy paper offers a clear and concrete path to growing the economy. The paper is far-sighted regarding where and what kind of economic growth and transformation we could see in the coming decades, and offers practical and implementable steps to achieving this growth and transformation. In addition, it is near-sighted (as opposed to short-sighted) in terms of the quick and easy “wins” that could get detractors onside, lending South Africa the near-term momentum we need to achieve our long-terms goals.
For example, if we roll out spectrum, eliminate work and tourism visa restrictions, and stabilise Eskom, we could see the kind of modest improvements in business confidence that would lead to moderate economic growth by this time next year.
More of the same is not sustainable. We need deliverables that lead to inclusive growth. Talking has accomplished nothing. We have – almost – run out of options. If South Africa takes on any further debt without economic growth, we run the risk of engineering a financial crisis. The MTBPS is a stake in the ground on these critical issues. And, to borrow from American politician Rahm Emanuel, you never let a serious crisis go to waste.