Finance Minister Tito Mboweni’s upcoming Medium Term Budget Policy Statement (MTBPS) is perhaps the most important for South Africa to-date, says Dr Adrian Saville, chief executive of Cannon Asset Managers.
Saville says that the resurgence of load shedding, crisis-level unemployment figures, and economic growth teetering between 0-1% means that 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 the gross domestic product (GDP) was projected at 1.5%, up from 0.8% in 2018,” he said.
“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%.”
However, Saville said that the budget deficit is just one of a number of issues that Mboweni needs to address.
“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.”
Below he outlined some of the other major points of concern heading into the 2019 MTBPS:
Saville said that 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.
“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,”he said.
Ratings agency Moody’s is set to deliver its next assessment on 1 November – directly after the MTBPS.
Saville said that Moody’s has given South Africa the benefit of the doubt for a number of years, and that this faith may be unwarranted.
“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,”he said.
“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.”
Saville said that South Africa also needs to tackle a suite of challenges simultaneously, namely:
- Eliminating corrupt and wasteful government spending;
- Reducing current government spending;
- Resolving various SOE constraints;
- 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,” he said.
The state’s wage bill has risen steadily over the past few years without the necessary productivity materialising, Saville said.
“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.”