South Africa’s 2019 budget must be judged on how it dealt with growth. While there were some positives, finance minister Tito Mboweni’s maiden budget speech did not present concrete solutions to guide South Africa out of its economic and financial crises.
It failed to deliver an economic plan in support of the positive State of the Nation Address, delivered by President Cyril Ramaphosa during the opening of parliament earlier this year.
We needed a credible plan to boost growth, considering that over the past ten years the South African economy has grown on average by only 1.7% per year. This rate is low, compared to most other middle-income countries, and far from the targets set by the National Development Plan (NDP). The NDP targeted 5% annual growth and the creation of 500 000 jobs per year. Today this is totally unrealistic and even the ANC has decided to scale this down to only 275 000 job opportunities per year.
A year ago, President Ramaphosa predicted that a growth rate of 3% was achievable. It has since changed to 1.7% and was later adjusted to a dismal growth of 1.5%.
One consequence of this lower than expected growth rate is that the budget deficit is increasing. The budget deficit for 2018/2019 will be 0.2% higher than the 4% predicted in the medium-term budget. This will rise to 4.5% the following year and the debt-to-GDP ratio will rise to 60.2% in 2023/2024.
This will be the first time since 1994 that the debt to GDP breaches the 60% level. For the past ten years South Africa’s debt has been growing year by year. If there were any efforts at all to stabilise the debt, they were not successful. Our country is already spending over R1 billion per day just on interest.
The poor growth performance is affected by several factors, including the slowing down of the global economy, which compromised South Africa’s ability to increase export earnings.
Another contributing factor is state owned-enterprises (SOE) receiving ongoing bailouts. While the Minister stated that the government will not provide further guarantees for the debt of SOEs, billions were allocated to the restructuring of Eskom. This is in addition to the guarantees government issued in respect of their debt in the past.
A turnaround plan of the SOE’s could decrease the pressure from rating agencies and also reduce the interest rate on government debt. South Africa does not have the resources to sustain the SOE sector indefinitely and the government must admit that the current structure of the state as the sole shareholder, is something of the past. On the whole these agencies have proved that they were not able to change or adapt to a new financial era.
Moody’s is scheduled to issue updated ratings in March. If South Africa is downgraded to sub-investment grade, billions of rand of bonds will flow out of South Africa. This is because the Citi World Government Bond Index does not allow asset managers to invest in junk status countries.
Moody’s responded to Minister Mboweni’s speech by saying it “highlights the government’s limited fiscal flexibility amid a challenging economic environment.”
To boost economic growth and create jobs, we need a fundamental change in our economic policy. The government should rather support the private sector, as they are the ones who visibly create employment and growth. The growth enhancing reforms in President Cyril Ramaphosa’s economic recovery plan is losing momentum and it is unlikely that this will alter the country’s growth projections significantly.
Knocking the term “white monopoly capital” and referring to “business champions” or “heroes” last year, was an effort by Ramaphosa to link up with the private sector. However, as long as no meaningful action is taken, the fiscus will deteriorate. You must do what is required in a capitalist environment and be frank with the unions so that they can deal with it.
Was enough said in the budget to motivate the private sector to invest again in South Africa? Definitely not. There are too many uncertainties, like land expropriation, and everyone is waiting to see what is going to happen with the election and if South Africa will be downgraded by Moody’s.