Johannesburg - Fallout from South Africa’s intractable problem of stunted growth and rising social discontent became more apparent yesterday as student protesters stormed Parliament, ratcheting up the chaos that forced Finance Minister Nhlanhla Nene to delay his medium-term budget policy statement for almost an hour.
It was the first time in post-apartheid South Africa that a budget speech had been disrupted. In the run-up to his speech, it was already clear that Nene possibly faced one of his biggest tests since becoming finance minister.
Not only is faltering growth chipping away at the government’s ability to generate more revenue, but it is also constraining the government’s ability to fund key programmes.
After almost an hour of wrangling between members of the EFF and the parliamentary speaker, security personnel were called in to drag EFF members shouting “fees must fall” out of the National Assembly so Nene could proceed with his speech yesterday afternoon.
Hundreds of students demanding a reduction in university fees stormed their way into the parliamentary precinct in unprecedented scenes just as Nene took to the podium. While those that were barricaded inside the National Assembly, including President Jacob Zuma, tried to present a modicum of business as usual, the chaotic scenes outside showed the extent of the challenges confronting the country.
Market reaction
The rand fell almost 2 percent to the dollar to R13.52 as the chaos unfolded. Nene, as expected, slashed his growth forecasts for this year, the next and 2017. He also signalled that falling tax revenues would put pressure on government debt in the years ahead.
Colen Garrow, an economist at Lefika Securities, said that yesterday’s chaotic scenes presented a troubling backdrop for investors.
“Disruptions inside Parliament (by the EFF) and outside of it (by students), are open to many interpretations. Significantly, it is a sign of democracy in action, and the underpinning of a sound constitution,” he told Business Report.
Even so, Garrow added that “the interpretation that may, however, hold sway, especially to investors looking for certainty and signs of stability, is that South Africa has become a riskier investment destination, and that they may therefore prefer leaving their capital in less volatile G-3 markets (Japan, US and EU), even though they offer lower returns. In short, politics lead economics.”
The EFF had argued for a postponement of the speech, saying the education fee crisis needed an urgent response from the government. Nearly all universities in the country have ground to a halt this week as protests over planned fee hikes spread.
Slow growth
Nene said the slow growth environment was in part a consequence of the global slowdown “but also reflects our energy constraints and the structural weaknesses in our economy”.
He said without stronger economic growth, the revenue trend would remain muted and that if revenue did not grow, expenditure increases could not be sustained.
Nene said the economy was projected to grow at about 1.5 percent this year, down from a February estimate of 2 percent. For next year, he forecast growth to reach 1.7 percent, way less than the 2.4 percent projected in his maiden Budget speech eight months ago.
“Electricity supply constraints, falling commodity prices and lower confidence levels have resulted in our growth forecast being revised lower,” Nene said.
“Limited employment growth and household income constraints are holding back consumption,” he noted.
Earlier this week China, which is the biggest purchaser of South African minerals and the country’s biggest trading partner, posted its weakest quarterly economic growth since the global financial crisis of 2009.
The ongoing ructions in the mining sector reflect the contagion that has spread to these shores as falling demand puts a squeeze on what remains a critical sector for providing jobs to hundreds of thousands of low-skilled South Africans.
Analysts maintain that the country needs to see economic growth north of 5 percent if it intends to make a meaningful dent in unemployment.
The student protests, they say, also underscore the weakness of the country’s policy response to the myriad socio-economic challenges that continue to dog South Africa 21 years since the advent of the current post-apartheid dispensation.
Rising debt
Nene said the government had adopted a package of fiscal policy measures to maintain the health of the public finances. Even so, the pressure on the government to borrow would persist, according to Nene’s projections.
He forecast gross public debt at 49 percent of gross domestic product (GDP) in 2015/16, and projected it to reach 49.4 percent of GDP in 2018/19 and 45.7 percent in 2019/20.
At these levels, South Africa was likely to see even more intense scrutiny on its debt profile by the credit rating agencies, analysts said.
Nene projected the budget deficit to reach 3.3 percent next year, wider than the 2.6 percent predicted in February, and to swell to 3.2 percent in the following fiscal year, up from 2.5 percent.
In a development that further illustrated the shrinking fiscal space, the Treasury said in the mini budget that contingency reserves had been sharply reduced to accommodate the increase in the wage budget for public servants and to fund social priorities.
“The R5 billion contingency reserve for 2015/16 was fully absorbed by the wage bill shortfall. Projected reserves of R15bn and R45bn in the outer two years have been cut to R2.5bn and R9bn, respectively.”
The Treasury said the shortfall in compensation budgets had significant consequences for public finances, absorbing resources that had been set aside for other priorities.
In 2015/16, gross tax revenue has been revised downwards by R7.6bn as a result of “weak performance of corporate income tax collection in the year to date due to steep decline in commodity prices and the slowdown in economic activity“.
Overhaul mulled
In total, lower growth has resulted in a downward revision of R35bn to gross tax revenue between 2015/16 and 2017/18. Gross tax revenue for 2014/2015 came in R7.3bn above projections in the 2015 budget, led by a strong growth in personal income tax.
Looking ahead, the Treasury noted that the Davis Tax Committee had published various reports on overhauling the tax system, in particular corporate income tax and VAT, which were under consideration.
“To date, no decisions have been made. But an increase in VAT remains one of the options available over the medium term to finance key elements of the National Development Plan,” it said.
Annabel Bishop, Investec’s chief economist, described the latest medium-term budget as “poorer than expected” as far as fiscal metrics go, with fiscal slippage over the period 2016/17 to 2018/19 in evidence as the budget deficit widened and the projection of gross loan debt climbed to 49 percent this fiscal year from 47 percent, and elevates to 49.4 percent of GDP by 2018/19.
“We think South Africa will receive a one-notch credit rating downgrade from Fitch from BBB to BBB- for foreign long-term debt, and from BBB+ to BBB for local currency long-term debt in its next country review in December,” she said.
But speaking to journalists before his speech, Nene sounded bullish, saying: “There would be no reason for a downgrade” because South Africa continued with fiscal consolidation.
BUSINESS REPORT