The ideal conditions for an “aloe ferox” economy
Mzukisi Qobo and Heinrich Krogman
Following the State of the Nation Address, expectations were for Finance Minister Tito Mboweni to address two critical issues during the budget speech: how the government intends to improve South Africa’s sluggish economic growth and how it will address the intensifying fiscal risks posed by state-owned enterprises (SOEs).
In a spirited performance fuelled by gardening and biblical metaphors, Mboweni sought to exhort the public that the economic storms are momentary and that the country will soon find its “green shoots”. The thrust of the budget is moderate, retaining redistributive elements while pointing to looming adjustments in public spending and some restructuring in the public sector, including government bureaucracy and SOEs.
The downward revision of South Africa’s forecast economic growth for 2019 is less exciting albeit perhaps more realistic given the state we are in. The last Monetary Policy Committee statement estimated real GDP growth for 2019 at 1.7% while the 2019 budget estimates a slightly slower 1.5%. Treasury expects household consumption to remain flat, with inflation remaining in the middle of the target range, while exports and gross fixed capital formation is expected to marginally increase.
Many of the downside risks prior to the budget speech have materialised according to Minster Mboweni, unfortunately not clarify which ones. This was likely a nod to mounting government debt and a signal that the fiscus will get a bit worse before getting better. His medium-term budget policy statement in October highlighted that South Africa is a small open economy and that global economic developments affect our recovery. Fair enough, but global economic risks have not increased.
On the international front, the US Fed is keeping rates on hold for now and the rand has appreciated from R 14.50 in October 2018, to R 13.77 in February 2019. The price of Brent Crude oil has reduced significantly from its peak of $ 86.29 in October to yesterday’s $67.08. Meanwhile, to no one’s surprise, the global economy continues its low growth trajectory – a forecasted 3.5% for 2019.
The major factors that have undermined economic performance relate to weakening the political and economic institution. The rule of law has weakened with the institutional decay at the National Prosecution Authority and other law enforcement agencies; SOEs have been a drain on the fiscus, and business confidence has weakened over the past four years due to policy uncertainty.
This leaves domestic issues as the key drivers of downward risk. These require bold leadership and political will to tackle. The Medium-term Budget Policy Statement highlights some of these issues: an unaffordable public-service wage agreement and more budgetary support for some state-owned companies. Unfortunately, these risks are self-inflicted and the proverbial can, to address these issues head-on, has been kicked so far down the road that trying to do anything now will inflict more pain.
What is clear is that South Africa faces much tougher economic times ahead unless bold measures are undertaken to restructure the public sector, implement credible reforms in the economy, and improve institutions that are tasked with law enforcement. As a low hanging fruit, the cabinet will need to shrink significantly since it was bloated precisely to dispense with patronage.
To try and address some of the vexed issues related to the public sector, the budget introduced measures to reduce the compensation of employees by R 27 billion, but it increased the expenditure ceiling to accommodate provisional allocations for reconfiguring Eskom, costing an estimated R 69 billion.
These are modest measures at best. Beyond natural attrition of those close to retirement age, there will not be major cuts in the public sector in the foreseeable future. This is precisely because the government cannot take a unilateral decision on the shape of the public sector especially if this affects the conditions of employment of public servants. Even with voluntary severance packages unions have to be consulted through the Public Service Coordinating Bargaining Chamber. Such processes are likely to be long-drawn and create more friction between the government and the unions.
In order to inject dynamism in the economy, there is an urgent need to increase investment in fixed capital, move with speed on improving the business climate and implement policies that are pro-growth and geared towards job creation.
Further, greater attention needs to be paid to reorienting state-owned enterprises, there are no cookie cutter solutions here. In some instances, the solution could be to fix governance, operational challenges, and those related to financial mismanagement. In other instances, shedding fat, calibrating the balance sheet, and asset disposal – or selling equity to a strategic partner – may be required.
With respect to Eskom, in particular, the worst-case GDP growth scenarios suggest that should Eskom’s restructuring fail, and electricity supply worsen, the economy could go into a full recession for 2019 (-1.2%) and 2020 (-0.2%). See detailed analysis by Lesley Wentworth and Azwimpheleli Langalanga in this edition
However, the most realistic scenario point to a gradual push to implement key policy decisions with the associated improvement of confidence and decline in borrowing cost. Yet, the growth forecast would still be on the territory of 1.7% which is not enough to help the country come out of the unemployment doldrums.
Of the six budgetary prescripts put forward by Mboweni[i], the majority are aimed at addressing the failures of President Jacob Zuma’s administration. It will take time to overcome that legacy and put the economy on a better footing. At this rate, and with so much uncertainty, turning around the economy and fixing our institutions will require extraordinary political will that so far has been in short supply.
[i] The budgetary prescripts were:
- Achieving a higher rate of economic growth;
- Increasing tax collection;
- Reasonable, affordable expenditure;
- Stabilising and reducing debt;
- Reconfiguring state-owned enterprises; and
- Managing the public sector wage bill