Comment: A crisis too good to waste
JOHANNESBURG – 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 1 percent, the 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 percent, up from 0.8 percent in 2018. However, the economy unexpectedly shrank by 3.1 percent 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 percent.
The difference between the forecast and actual economic growth figure translates into a tax receipt shortfall of some R60 billion for the tax year ending March 2020. 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 Friday, 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 percent 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.
South Africa needs to tackle a suite of challenges simultaneously, namely: eliminating corrupt and wasteful government spending; reducing the 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, the 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 11 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 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 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. 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. And, to borrow from American politician Rahm Emanuel, you never let a serious crisis go to waste.
Dr Adrian Saville is the chief executive of Cannon Asset Managers.