South Africa risks becoming like Argentina: SARB

South African Reserve Bank (SARB) deputy governor Kuben Naidoo says that South Africa cannot afford to reject the tabling of its supplementary coronavirus budget as it will only prolong the country’s recession and make it harder to tackle the coronavirus pandemic.

Responding to critics in an opinion column for Business Day, Naidoo said that while it is true that government should spend more under the present circumstances, unless it sets out a clear and realistic path for reducing the deficit, South Africa’s access to capital markets will become more limited and more costly.

“Unless we demonstrate that we can repay our debts, at a point in future we will be unable to raise the amounts we need to tackle the devastating economic consequences of Covid-19,” he said.

He further cautioned that South Africa’s finances were ‘in far worse shape’ heading into the coronavirus pandemic compared to the 2009 financial crisis.

“Would we like to spend more? Of course, yes. Would we like to have the luxury of more time in which to reduce the deficit? Of course, yes. But because we have mismanaged our finances over the past decade; we do not have such luxuries.

“When there were calls over the past decade to restore our fiscal health and reduce the deficit, some of the same economists who now write in criticism of the budget rejected any proposal to reduce the deficit. We are now paying the price of that folly.”

Naidoo said that South Africa could get finances from abroad but indicated that this would just be a short-term fix. In the longer term we would have to pay back the loans with interest in a foreign currency, he said.

“That will have two effects. First, it will result in a continuous and steady flow of funds out of the country, and second it will increase the sensitivity of our currency and economy to global shocks in future.

“We risk becoming like Argentina: unable to pay our debt, giving up our sovereignty to outside creditors and limiting the developmental role of the state.”

Critics

The Bureau for Economic Research (BER) has also indicated that some of the criticism aimed at the National Treasury is unfounded.

In a note published on Monday (6 July) the BER said that analysts and economists – including a group of nearly 100 experts – are heavily criticising National Treasury for a number of budgetary and economic shortfalls that have come to light in recent weeks.

“A heated debate is raging about the fiscal consolidation outlined in the supplementary budget tabled on 24 June, the BER said.

“The debate ranges from vociferous critique against the planned spending cuts from 2021, to scepticism from rating agencies (and some local analysts) on whether the envisaged cuts could even be implemented.

“In our view, some of the critique directed against the Treasury is misplaced,” it said.

“The well-published delays with distributing the temporary Covid-19 Social Relief of Distress grant for vulnerable people who do not qualify for an existing grant is not due to Treasury keeping the purse strings tight. Rather, it is a function of wider government inefficiencies,” the BER said.

“The impact of the relief package is also being diluted by low take-up of the R200 billion loan guarantee scheme. Again, the blame for this should not be laid at Treasury’s door,” it said.

Read: A group of nearly 100 experts have sent a warning about South Africa’s budget – here’s what it says