A make-or-break week for South Africa

South Africa’s Labour Court is set to hear a wage dispute between public service unions and government on Wednesday (2 December), in a case that could prove to be vitally important for the country’s economic recovery.

The dispute centres around the final year of a three-year deal that government entered into regarding public servant salary increases.

Government reneged on the deal earlier this year – denying public servants the agreed-on wage increase for 2019/20 – with finance minister Tito Mboweni going even further in his October budget, announcing that government will freeze public service wages over the next three years.

The Department of Public Service Administration and the National Treasury argue that further increasing public sector wages would be unlawful and unenforceable.

“What government and the South African economy cannot now afford, and what is not just and equitable under the current circumstances, is for civil servants to claim yet further inflation-beating and private-sector-outperforming salary increases off an already high base,” Mboweni said.

In court documents, the finance minister has also argued that a wage increase could precipitate a fiscal crisis.

Public Service and Administration Minister Senzo Mchunu said that government would be compelled to borrow more than R78 billion if the court backs the labour unions in their fight to have the wage agreement implemented.

For its part, the Congress of South African Trade Unions, the nation’s largest trade federation, has warned the dispute over salaries could lead to the unravelling of its alliance with the ruling ANC.

Poor track record

Credit ratings agencies have cited the agreement as one of the key reasons behind South Africa’s latest downgrade, indicating that government does not have the capacity to fully rein in public spending.

The agencies stated that government’s proposed fiscal consolidation plan is unconvincing and that the plan to freeze public sector wages is unlikely to happen, given its poor track recording in dealing with unions in the past.

National Treasury said that government’s policy priorities remain economic recovery and fiscal consolidation, as outlined in president Cyril Ramaphosa’s Economic Reconstruction and Recovery plan and the Medium-Term Budget Policy Statement released in October.

“The social compact agreed to between government, business, labour and civil society prioritises short-term measures to support the economy, alongside crucial structural economic reforms.”

The government hasn’t had a good track record in maintaining a lid on public spending during the past decade, said Jan Friederich, Fitch’s senior director of sovereign ratings.

South Africa faces the twin challenge of lower growth and rising debt levels, Friederich said on Bloomberg TV. A plan to improve government finances through a public wage freeze, may come unstuck, he said.

“If you look back the past decade, there have always been overruns in wage negotiations even when the offer from the government was quite a bit more generous than inflation,” Friederich said. “Now a wage freeze in an environment where there is still some inflation is quite a drastic measure. A lot of the savings depend on it and its highly uncertain.”

Without state salary cuts, government would be left with very little wiggle room, with the South African Reserve Bank unlikely to reduce interest rates any further in the cycle.

The government’s debt projections for the coming years are also deteriorating and should it opt to raise spending to boost growth, that may “exacerbate” the debt challenges, Friederich said.

“They rely very heavily on the wage negotiations next year,” he said.

Options

With the back-pay problem hinging off the coming court battle, Intellidex analyst Peter Attard Montalto has noted that government does have options available to it for the next round of wage negotiations.

At the most extreme, it can just impose a solution, he said, if political agreement with unions isn’t possible.

“Mboweni must have had political sign off to publish this wage path, but implementing it would be another matter, and we have never heard the President back anything like this publicly. Things are also unlikely to be clearer in February (Budget 2021).”

The public sector wage bill court case on this year’s freeze is only starting this week, and is likely to be ongoing under appeal and not resolved by the next budget speech, Attard Montalto said.

“We only see it resolved through the Constitutional Court in the middle of 2021 with further delay risk. This adds significant backpay risk,” he said. Should government lose the case, as much as R294 billion in back-pay could be on the cards.

“There is significant strike risk from unions stemming from this outlook. We see political commitment to this as paper-thin,” he said.

Failing union support for the wage freeze, Attard Montalto said the government has some heavy-handed options open to it, including:

  • Cut workers, targeting the least productive ;
  • Impose wages unilaterally;
  • Cut allowances and stop progression and other perks.

“Overall there is a lot resting on this one issue,” the analyst said.


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A make-or-break week for South Africa