South Africa faces yet another watershed budget on 28 October when Finance Minister Tito Mboweni provides details on how he plans to enact R230-billion worth of savings over the next three years to take South Africa to a primary surplus and pull us back from the brink of a debt trap.
Our fiscal and macroeconomic challenges are mounting. Yes, the combination of accommodative monetary policy and fiscal stimulus, the likes of which have never been seen before, did help to soften the recessionary effects of lockdown and keep markets well buoyed. However, amid more than 43 million Covid-19 infections and more than a million deaths globally, a second wave in motion, continuing elevated volatility, upcoming geopolitical events including the US election just days away, there is heightened uncertainty for our global and local economies.
SA is in a precarious position
South Africa was precariously placed going into Covid-19, which meant the risk premium in local assets was already lofty. Despite South Africa’s early move into lockdown, the poor implementation of policy decisions has highlighted the country’s precarious financial situation. Risk premiums increased even further as foreign investors dumped South African assets at a ferocious pace. Local bonds were arguably the most vulnerable, since at the heart of South Africa’s problems lay large amounts of debt that needed to be serviced at double-digit yields, amid very subdued growth.
South Africa’s fiscal problem is the culmination of many years of poor policy choices. On the expenditure side, the wages of government employees have enjoyed real growth of 3% per annum since 2009, while the economy has only averaged real growth of 1.2% over the same period. This has meant tax revenue has not kept pace, forcing expenditure to be reduced in other, more productive areas.
State-owned enterprises (SOEs) have further crowded out productive expenditure due to their continuous demand for government support and Eskom remains the biggest risk to the economy. Years of mismanagement have resulted in an unsustainable debt load and unreliable energy supply that place added pressure on the fiscus and reduce the long-term growth potential of the local economy.
Covid-19 has placed a further burden on government finances as tax revenue will drop by about R300-billion, which will force hard decisions to be made about further expenditure cuts and other reforms. Interest service costs will skyrocket to around 25% of tax revenue over the next three years, which will place South Africa on the precipice of a debt trap.
Markets have lost faith in policymakers’ ability to right the situation. We need to see tangible steps put in place that detail how the bloated wage bill will be reduced, how Eskom will be set on a path to operational and financial stability, and how growth can be reaccelerated. Further disappointments include the government’s attachment to the beleaguered South African Airways and the scale of misappropriation of government tenders during the Covid-19 crisis.
Some rays of hope
In the past month, there has been some good news. The National Energy Regulator of South Africa has approved a plan to tender almost 12 gigawatts of power generation capacity, predominantly from renewables, and there seems to be consensus on a plan between labour, government and business that will address some of Eskom’s problems. In addition, the Independent Communications Authority of South Africa has finally announced that high-demand spectrum will be auctioned this fiscal year, which will introduce between R8-billion and R12-billion of revenue. Another encouraging sign is that there have been some high-profile arrests on the back of the ongoing graft investigations.
But the stakes have never been higher
In summary, South Africa is on the brink of a debt trap due to the culmination of many years of poor policy choices that have been exacerbated by the effects of the Covid-19 crisis — and we need to address this as a matter of priority.
At the heart of the country’s problems lies a large debt load that is being financed at exceptionally high levels of interest and ailing SOEs, key among them Eskom. Policy choices are moving in the right direction; however, the political will to implement appears sluggish.
Investors are sceptical of the government’s ability to get South Africa out of this debt hole — and will be looking for concrete action to address it. We hope that Mboweni and his counterparts make some hard but necessary budget decisions for the sake of the South African economy. DM/BM
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