The most difficult job in South Africa right now

South Africa’s newly-appointed finance minister Enoch Godongwana is taking on one of the most difficult jobs in the country, says Business Leadership South Africa chief executive Busi Mavuso.

Mavuso said that the job is especially hard considering the sharply deteriorating debt position of the sovereign, which triggered the loss of investment-grade ratings last year, and is a risk to the entire economy.

“A fiscal crisis, which would inevitably trigger a financial crisis and deep recession, is a risk that businesses must factor into their outlook,” she said.

“That diminishes confidence and sharply reduces investment appetite, which in turn reduces growth.

“As a result, government cannot spend its way to growth – the impact on the sovereign balance sheet of spending at the current level of indebtedness damages confidence and can easily be net negative for growth.”

Mavuso said that there is no alternative but to constrain spending so that the fiscal outlook improves. In choosing what to restrain, Treasury must make difficult trade-offs, she said.

“Consumption spending is the real problem – this has lower multiplier effects into the economy than investment.

“Investment must be central to our economic recovery thinking, as president Cyril Ramaphosa has repeatedly made clear. Public sector investment is a key part of the overall investment drive and should be protected. It is consumption expenditure that must be constrained.”

Structural reforms are also fundamental and have the potential to provide stimulus for free, Mavuso said.

“The Operation Vulindlela project running between the presidency and National Treasury has been arguably the biggest confidence boost so far that the reforms often referred to by the president will become a reality.

“It will be important that Vulindlela gets the new minister’s firm and public backing, as it had from his predecessor.”

Treasury not as strong as it was 

Godongwana will also have to manage the competing demands for finance from across government, said Mavuso.

“A disturbing trend that business has been concerned about for some years has been a perception that Treasury’s authority on spending has become less absolute.

“Fiscal decisions that have no rational connection to policy objectives have become too common.”

Mavuso pointed to the bailing out of South African Airways as an obvious example.

While every part of government wants more money, Treasury is the institution that must consider the trade-offs, she said.

“It must be endowed with the skills to assemble and study the evidence for the real impact of spending choices.

“Evidence must be central to how our scarce resources are allocated. The minister will need to demonstrate great political skill to hold the line on this – his cabinet colleagues will need to accept it when Treasury evidence shows that their pet project is not in fact the best use of public money.”

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