MTBPS highlights the crocodile jaws closing around SA’s economy

Maarten Ackerman, Chief Economist and Advisory Partner, Citadel

Calling a spade a spade, Finance Minister Tito Mboweni’s Medium Term Budget Policy Statement (MTBPS) was refreshingly honest about the precarious situation the country now finds itself in, and the severe challenges we face. Most notably, he was candid about South Africa’s dire situation: we are effectively facing crocodile jaws that are widening to swallow the South African economy, as tax revenue has continued to fall while government expenditure has continued to rocket.

National Treasury has adjusted economic growth expectations for 2019 downwards to 0.5% from the 1.5% forecast in February’s Budget Speech. Additionally, weak demand, shrinking corporate and personal tax collection and anaemic economic growth mean that the country’s budget deficit is expected to increase to 6.5% in 2019, and the debt-to-GDP ratio is expected to rise to 71.3% by 2022/23.

On the other side of the coin, government expenditure this year has already exceeded the projected increases budgeted for in February, with even more spending still in the pipeline.

Mboweni then offered a stark warning to government that this situation is quite simply unsustainable, and could see South Africa fall into a debt-trap. 

For example, based on its current trajectory, the MTBPS demonstrated that without implementing the necessary reforms, this combination of rising spending and falling income would see South Africa’s debt-to-GDP ratio breach the 80% mark within the next ten years. This number would then send credit rating agencies screaming, and almost certainly see South Africa suffer more ratings downgrades.

The rand reacted violently to the speech, immediately shedding 20 cents and weakening from R14.60/$ to R14.80/$, while bond markets also saw a sell-off. The rand ended the session north of R15.00.

Staving off the crocodile’s jaws

Capping South Africa’s growing budget deficit and staving off the vice-like crocodile jaws gripping the economy will necessitate increasing tax collection on the revenue side – and Mboweni did mention that we could expect to see more tax increases in the 2020 Budget Speech. However, government is aware that it does not have much room to manoeuvre in this regard, as businesses and consumers are already under severe pressure, and further increases are likely to have a very limited impact in terms of generating additional revenue.

That leaves government only one other option to increase revenue, namely kickstarting economic growth which would, in turn, increase the size of tax base.

Consequently, Mboweni outlined the key short-, medium- and long-term issues that government needs to target, and on this front it was very positive to see that one of the first areas that the state will be turning its attention to is tourism.

The tourism sector represents low-hanging fruit for driving economic growth: the country has a great deal to offer tourists relative to the rest of the world; the sector doesn’t require a huge amount of energy (which avoids placing additional pressure on Eskom); and for every tourist that visits our shores, some 10 jobs are created. Measures such as reducing the cost of travelling to South Africa and reducing the amount of red tape for visas therefore represent easy wins for the country, and could quickly see results.

Other measure such as diversifying the country’s power generation, expanding telecommunications capacity and lowering the cost of business are also crucial for kickstarting growth in the medium term. But after years of seeing good ideas on paper with little action, I hope I will be forgiven for remaining somewhat sceptical about the prospect for implementation.

This said, Mboweni arguably seems to be quite bullish on government’s ability to successfully act on the reforms needed to drive growth, as despite the headwinds of slowing global economic growth, National Treasury expects South Africa’s GDP growth to increase from 0.5% in 2019 to 1.2% in 2020 and 1.7% in 2021.  

Balancing the budget

One of the fastest growing items on government’s expense sheet is the country’s debt-service costs, with average nominal growth of 13.7% expected between 2020/21 and 2022/23.

These costs, unfortunately, are drawing spending power away from critical areas such as skills development, job creation, education and healthcare, underscoring again that something needs to be done to halt South Africa’s debt spiral.

And on this front, the elephant in the room is quite obviously the public sector wage bill, which is currently the largest of all the OECD countries relative to GDP, accounting for 46% of all tax revenue in 2019/20 as a result of years of an increasing public sector headcount and above-inflation wage increases. Mboweni pointed out that adjusting for inflation, the average government wage has risen by a shocking 66% over the past 10 years – completely disproportionate to increases in the private sector, and without achieving a commensurate rise in productivity.

The question remains, however, whether government will be able to do anything about its wage bill, and particularly whether it will be able to successfully negotiate with trade unions to moderate wage increases to levels in line with or even slightly below inflation.

Far more optimistically, Mboweni said that he would also deal with the executive remuneration at State Owned Enterprises (SOEs) and fiscal leakage. For the foreseeable future, salaries of Cabinet, Premiers and MECs will thus be frozen at current levels, demonstrating that the top layer of government will have to take the pain along with society as a whole.

Additionally, cars for Cabinet and the executives will be capped at R800,000 (incl VAT), although this is still at the luxury end of the scale, especially when compared to the average South African who uses public transport. Capped cellphone claims and economy class domestic travel further round out budget cuts, and I for one am rather pleased to note that there will be more of us travelling in the back of the plane.

Other short-term plans for cutting back on excess expenditure are expected to result in some R20 billion in cost savings from various departments. But, while capping expenditure is important, the magic ingredient needed to restore the economy back to health over the next three years is rather to stimulate economic growth through policy implementation.

Talking the talk, but can he walk the walk?

On the policy front, it is extremely positive to note that Mboweni’s recently published economic plan (entitled “Economic Transformation, Inclusive Growth and Competitiveness: Towards an Economic Strategy for South Africa) draws lessons from fast-growing emerging and sub-Saharan African economies – particularly as five of the fastest growing countries in the world are currently in Africa.

Ethiopia, for instance, is a great role model for this country, demonstrating that the goals and targets outlined within Mboweni’s plan are within our reach if government takes action and begins implementing the right policies.

The minister particularly mentioned that the ten major criteria that he wants to prioritise are within his blueprint document, which has received widespread feedback. Again, however, it is one thing to mention this plan within the MTBPS and quite another to actually start walking the walk, and all eyes will be on Mboweni to see whether he is able to deliver on his plan.

Mboweni also made it quite clear that the poor performance of SOEs needs to be addressed, although there was, unfortunately, a further allocation for them. It is, however, good to note that SAA is in discussions regarding a public-private partnership, something which has not been spoken of for quite some time, but which should yield a very positive outcome for the fiscus.

The numbers at this stage look exceptionally dark, particularly our deficit and debt-to-GDP ratio, so if we can remove the burden of the SOEs, we would be able to fix the sustainability of the fiscal metrics.

In summary, on this trajectory, it is a question of when we will be downgraded, not if. At this stage, Moody’s is our only saving grace, and they seem to be willing to give us a little bit of time to see if we can deliver on our plans. But this is likely to be the last opportunity that we will get – if we get it at all.

Given these numbers, if we do not see the proper implementation of Mboweni’s economic growth proposals, we will certainly be downgraded going into 2020. However, if we do put plans in place to get growth going, implement fiscal discipline and address the problems at the SOEs, then I believe that the worst-case scenario might be avoided and we could move onto a more sustainable future path.

A successful outcome will, however, require hard work and commitment from all of us, including the trade unions.