Deputy minister of finance David Masondo has outlined some of the financial issues and opportunities currently facing South Africa.
Speaking at a JP Morgan event this past week, Masondo said that low economic growth, a high wage bill, and state-owned enterprises are some of the biggest issues weighing on South Africa right now.
“It will take a close working partnership between government, investors, corporates and labour unions to find solutions to these challenges; and to implement these solutions,” he said.
Below are some of the most noteworthy points from his presentation.
Under the leadership of president Ramaphosa, Masondo said that government is working on a number of ‘growth-enhancing interventions’.
Among other factors, he said these would include:
- The new Integrated Resource Plan;
- The Infrastructure Fund, which will mobilize both public and private-sector funding for infrastructure, is being rolled out;
- The visa regime of the country is being greatly simplified;
- The unabridged birth certificate requirement for minors visiting the country has been abolished;
- A number of industrial parks have been upgraded, and we have approved the demarcation of more SEZs; and
- Cabinet has instructed ICASA to implement the licensing of broadband spectrum.
“These and other interventions will ease bottlenecks, create new opportunities for small and medium-sized businesses, and allow for greater investment in public infrastructure for the provision of services,” he said.
The role of pension funds
Masondo said that growing the economy will require the increase of both foreign and domestic financial capital.
“At this point, let me be clear about our views. Firstly, from the Finance Ministry’s perspective, the savings of workers must be protected. In this regard, they should never be exposed to risks emanating from poor financial management in either the public or the private sector.
“Secondly, the onus must be on economic actors to ensure that the value proposition of the investment is sound,” he said.
Masondo added that the government should not compel asset managers to invest their clients’ money in unsound or poor-return projects.
Economic actors should also behave as South African ambassadors and send the correct message to international counterparts that South Africa is ready to do business with them, he said.
“In channelling savings appropriately, let us not forget that the size of long-term fund managers such as pension funds alone is a source of enormous power and influence in driving economic growth and reform.
They have the ability to secure longer-term returns by insisting on high standards of delivery, governance, and social responsibility.
“We need to ask ourselves this: what prevents the full potential of these instruments from being unleashed on the economic potential before us?”
Cutting spending and wage freezes
Masondo said that his department is working on a short-term intervention to stabilise debt caused by expenditure.
“We have set ourselves the goal of achieving a primary balance – that is, to close the gap between annual non-interest spending and annual revenues by 2022/23.
“We have already identified around R50 billion of spending reductions in the next two years, and the outer year of the MTEF will contain spending that grows no more than in-line with CPI,” he said.
However, he noted that this sum is not enough and that a primary balance will also require an additional R150 billion in reductions.
“As a matter of policy we have also decided that this should not come from service delivery and investment components of spending.
“The opportunity is ripe for us to not only cut spending, but also improve the composition of that spend, and ensure that the majority of our budget is allocated to growth-enhancing spending.”
Masondo said that a ratings downgrade will make things substantially worse by raising the cost of borrowing for government, SOEs and this will spill-over to private enterprises and eventually all borrowings across the economy.
This will force borrowing costs, including for households to rise, causing a further decline in investment, he said.
He added that banks and corporations, faced with increased borrowing costs, will pass on this to consumers by way of higher interest /bank charges, cut back on lending, and cut back on investments.
“All this will slow down the real economy,” he said.
The slowdown will generate a negative feedback loop/vicious business cycles, putting more pressure on the government’s future credit rating.
“National Treasury is alive to the great anticipation for the 2020 Budget Speech where we are expected to outline details around fiscal consolidation measures particularly relating to Eskom and the Wage Bill.
“Relevant government departments will be working very hard in the coming weeks to meet these expectations where possible. Again, government would welcome all support available to move us forward.”