Business Maverick

Mboweni’s Tough South African Budget Task Laid Out in Charts

By Bloomberg 28 October 2020

South African Finance Minister Tito Mboweni will have to balance finding money to help Africa’s most-industrialized economy recover from its longest recession in three decades, bail out state-owned companies and fund civil servants’ pay increases with pledges to rein in government debt and shrink the budget deficit.

These charts show the tough task Mboweni faces when he presents the country’s third set of budget plans this year on Wednesday.
Deteriorating Outlook

Lockdown measures to curb the spread of the virus weighed on revenue collection and the forecast for the consolidate budget deficit for the year through March 31 could now be even wider than the 15.7% of gross domestic product that Mboweni projected in the June supplementary budget.

Debt Stabilization

Debt as a percentage of GDP will peak in 2024, but that’s in the Treasury’s best-case scenario, where the government takes active steps to stabilize the trajectory and revive the economy. The cost of servicing the country’s loans has been the fastest-growing expenditure item since 2011 and is forecast to climb even further. While the cabinet backs Mboweni’s plans to target a primary budget surplus by 2023-24, any austerity measures are likely to face opposition, including from politically influential labor groups.

Read more: Charts Showing How The Virus Worsened South Africa’s Debt Woes

Pay Politics

Plans to reduce the public-sector wage bill, which has climbed by 40% over the last 12 years, have stalled and the Treasury has warned a bid by unions to compel the state to honor a salary deal would lump the country with 37.8 billion rand ($2.3 billion) of additional debt.

If the government is concerned about ruining its long-term relationship with labor groups, which would affect service delivery, it could grant the 1.5% increase for 2020 promised in February and in return demand a compromise that would allow it to increase pay by 3% for the next two years, Michael Kafe, an economist at Barclays Bank Plc, said in a report. That would still allow it to save 176 billion rand of over the three years, the same outcome as a wage freeze in 2020, followed by 4.5% increases in the following two years, he said.

Financial Burden

Mboweni faces pressure to continue to support state-owned companies. While power utility Eskom Holdings SOC Ltd. has accounted for the vast majority of bailouts since 2009, the minister is expected to announce further support for South African Airways, arms company Denel SOC Ltd. and The Land and Agricultural Development Bank of South Africa this week.

With even more companies under pressure the “government and the finance ministry are going to have an avalanche of requests in the coming months,” said Mike Schussler, chief economist at Economists.co.za.

Read more: South Africa May Give Denel, Land Bank More Funds to Stay Afloat

Widening Gap

If the government fails to lower the public sector wage bill and reduce lifelines for state companies, it’ll be forced to continue cutting allocations for government departments to narrow the gap between spending and revenue. With Mboweni due to outline spending and revenue-adjustment measures amounting to about 250 billion rand over the next two years, 30% of economists polled by Bloomberg expect him to lay the groundwork for a wealth tax, among other levies.

Read More: Wealth Tax Among Mboweni’s Options to Fund South Africa’s Budget

Bad to Worse

Spending cuts and tax hikes could could hinder the recovery of an economy that’s expected to shrink 8.5% this year, according to a separate Bloomberg survey. That would be even worse than during the great depression. The Treasury will probably revise its June estimate for a 7.2% contraction this year, after the lockdown weighed on output, forced struggling companies to shut down and left millions without work.

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