London - The Treasury has embarked on a pre-Budget public consultation inviting the South African public for their views on the country’s fiscal policy.
Presumably Finance Minister Enoch Godongwana will incorporate some of the feedback in his 2023 Budget to parliament next February. But the six standout macroeconomic indicators that will nevertheless preoccupy him are the cost-of-living crisis; record inflation levels; burgeoning public debt; subdued GDP growth; high unemployment and the real threat of sovereign debt default risk.
The above economic challenges are universal and not unique to South Africa. The IMF in its World Economic Outlook (WEO) Update in July 2022 painted a gloomy and more uncertain global economic scenario for 2022 and beyond. GDP growth is forecast to slow from 6.1% in 2021 to 3.2% in 2022 and 2.9% in 2023 - 0.4% and 0.7% lower than in its April 2022 forecast.
The major driver is the stalling GDP growth in the US, China and the EU – the three largest economies in the world, with important consequences for the global outlook. The message to finance ministers per se is loud and clear: “Global inflation has been revised up due to food and energy prices as well as lingering supply-demand imbalances, and it is anticipated to reach 6.6% in advanced economies and 9.5% percent in emerging market and developing economies this year. In 2023, disinflationary monetary policy is expected to bite, with global output growing by just 2.9%.”
As a species, finance ministers and for that matter central bank governors, are caught between a rock and a hard place. Rising food and fuel prices continue to squeeze living standards worldwide. Not surprisingly, taming inflation says the IMF “should be the first priority for policymakers. Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them. Targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.”
Whatever rhetoric of aspirations the Treasury’s public consultation reveals, Godongwana’s hands like those of his fellow finance ministers are tied, with limited fiscal space to manoeuvre, thanks largely to the ongoing impacts of the pandemic, the Ukraine disruptions and the resultant global economic shocks.
In response to COVID-19, both advanced and emerging market economies rightly implemented large fiscal stimulus programmes that have pushed public debt to historically high levels. The combination of higher debt and challenging economic conditions especially stubborn low GDP growth has elevated default risks, tightened borrowing constraints, and triggering a wave of debt downgrades, especially in emerging market economies. Not surprisingly, the Fund flags future debt reduction strategies, but these are often centred on fiscal rules that constrain public spending, which in South Africa is a highly politically sensitive issue.
No economy today can function without public and private debt. That is the very raison d’etre of market capitalism and the prevailing fractional reserve global banking system.
Whether public debt is good, or a ‘necessary evil’, detracts from the fact that like most of the other socio-economic metrics it is highly skewed and affects emerging economies disproportionately, often leading to a debt trap either to the IMF/World Bank, other multilaterals, and bilateral arrangements with individual countries or blocs such as the US, China, EU and the UK.
The ability of a country to service interest payments on its national debt and the redemption of the principal depends entirely on the size of its tax and other revenue base. South Africa’s debt to revenue ratio compares poorly with the advanced economies, whose tax base and collection is much larger and more effective.
According to Godongwana, public debt “currently stands at R4.3 trillion, projected to rise to R5.4 trillion over the medium-term. Our debt servicing costs average R330bn annually, among the largest portion of our spending.” At the Spring Meetings of the World Bank/IMF in April, he pleaded for the “availability of more concessional finance (which) is paramount if high and unsustainable debt levels, particularly in Middle-Income Countries, are to be arrested.”
His call was duly answered. In June, almost unnoticed the World Bank approved a €454.4m (R7.6bn) loan request from Pretoria for South Africa’s COVID-19 Emergency Response Project. “The low interest loan forms part of government efforts to reduce debt service costs by making use of cheaper sources of funding," stressed Ismail Momoniat, the Treasury Acting Director-General.
Some experts would argue that South African national debt in 2022 at 70.2% of GDP is manageable straddling the two extremes of its African rival economies - 94% in Egypt, and 37.4% in Nigeria – but rising. Cairo will spend 8.2%, Pretoria 4.7% and Abuja 2.3% of GDP in 2022 just to service the debt.
A potentially serious issue is default risk. Bloomberg’s Sovereign Debt Vulnerability Ranking shows that of the 25 countries with the highest sovereign debt default risk in 2022, 13 are from Africa. South Africa is ranked 15th, Egypt 5th, and Nigeria 24th, which increases the cost of finance despite Gondongwana’s call for concessionary finance which is ring-fenced for pandemic mitigation.
The IMF in a technical paper in July titled ‘Economic Growth After Debt Surges’ argues that it is not clear whether the impact of the large surge in corporate and public debt during the pandemic will damage growth prospects in the years ahead, because the relation between debt surges and future economic prospects are complex.
The elephant in the room for South Africa is as the results suggest that output is persistently lower after a total debt surge, and GDP growth depends on pre-existing debt and economic conditions, including size and type of debt and public spending; low levels of public and private investment; and consumption patterns.
Cape Times