February 24, 2020

SOUTH AFRICA: Mboweni’s do-or-die budget

BY Anne Frühauf

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( 6 mins)
  • Expectations ahead of the budget presentation on 26 February are largely pessimistic in the context of deteriorating economic growth and skyrocketing public debt.
  • Finance Minister Tito Mboweni will try – against all odds – to avert the loss of South Africa’s final investment-grade credit rating.
  • Yet no real fiscal improvements are expected on October’s medium-term budget, especially in the short term; at best, the government will provide some evidence of reforms of the huge public-sector wage bill and failing state-owned enterprises (SOEs).

Finance Minister Tito Mboweni must back up President Cyril Ramaphosa’s State of the Nation Address (SONA) with fiscal measures while trying to avert the loss of South Africa’s final investment-grade credit rating from Moody’s, though a downgrade is largely seen as a foregone conclusion at this point. If October’s Medium-Term Budget Policy Statement (MTBPS) was the Treasury’s attempt to pull the emergency brake by graphically projecting South Africa’s runaway debt, this budget will be judged for any signs of a turnaround. The macro context makes this an uphill struggle, though Ramaphosa’s government may try to create the impression of a turnaround via strategic announcements.

These are the key issues on which Mboweni’s budget will be judged:

  • Consolidating public spending: More than ever, Mboweni needs to show that the government is serious about stabilizing ballooning debt and containing the primary deficit. Yet growth expectations have been dampened further since October. While the mid-term budget projected GDP growth of 1.2% for 2020, this is already looking optimistic, for example, next to Moody’s revised forecast of 0.7%, particularly amid power outages that are expected to trump those of 2019, not to mention exogenous factors. Closely watched will be whether Mboweni adjusts (in either direction) the alarming debt trajectory painted in the MTBPS, which expected public debt to rise to about 68% of GDP this year and 80% over the medium term (see graph). It is also uncertain whether Mboweni can improve the MTBPS forecast of South Africa’s budget deficit, which it saw peaking at 6.5% of GDP in 2020/21, before declining marginally. To consolidate spending, the Treasury has conceded that it needs to deliver savings of at least ZAR 150bn over three years. Mboweni will likely do everything to show that the government has a plan, but this could fall short given that the government’s wiggle room for cuts has shrunk steadily over the past decade.

SOUTH AFRICA: Mboweni’s do-or-die budget 1


  • Wage bill: A key element of spending consolidation will be slashing the public-sector wage bill, which consumes around 46% of tax revenue. A wage freeze would be ideal. However, a more realistic scenario may be increases linked to inflation, combined with staff attrition and adjustments to
    other allowances, because Ramaphosa’s government needs trade union support on broader issues, including SOE reform. Moreover, despite on-off talks between the government and unions, the current three-year wage agreement has not been reopened and runs until 2021; hence any wage bill savings are only likely to materialize in the outer years, rather than this fiscal year.
  • State-owned enterprises: Mboweni could come up short on promises to avoid further bailouts and guarantees concerning SOEs, which would reinforce the narrative that the once all-powerful Treasury has lost its ability to hold the fiscal line. A positive (if unlikely) fiscal sign would be planned asset disposals. Yet regarding the biggest issue – Eskom and its unsustainable ZAR 454bn debt burden – the budget, like the SONA, may not deliver anything concrete. Still, the government will talk up whatever could be construed as a positive signal, possibly even by announcing a vaguely worded power-sector ‘compact’ between the government, labor, and business at the National Economic Development and Labour Council (Nedlac).
  • Revenue side: While the fragile economy leaves no room for tax increases, the dire fiscal situation forces the government to squeeze taxes from every last corner. This will mainly mean administrative tightening, rather than rate adjustments, though speculation increased this week that Mboweni could announce a one-off levy on corporate and personal income similar to the 1995 “transition” levy imposed by the post-apartheid government struggling to manage its inherited debt burden. Moreover, some economists now anticipate a VAT increase from 15% to 16%. This would be seen as the clearest fiscal boost, but the political obstacles are phenomenal. Remembering how controversial the 2018 hike was, 2020 is hardly an inopportune time for another hike: it would irk the ANC camp advocating for economic stimulus ahead of the party’s National General Council (NGC) in July, risk alienating labor which Ramaphosa needs to bring on side in relation to SOE reforms, and further antagonize cash-strapped consumers ahead of local elections in 2021.
  • Reform commitment: Building on Ramaphosa’s SONA, Mboweni will also be expected to provide the meat of government plans to set South Africa on a new economic path, if only over the longer term. Scrambling to provide upsides, Mboweni’s speech may feature the energy sector (e.g., independent power producers), the long-planned infrastructure fund, and broader efforts to reduce the cost of doing business (e.g., port tariffs). Also headline grabbing will be any details around the sovereign wealth fund and the state bank proposed in the SONA. Fiscally, such initiatives will likely be meaningless in the near term; rather, it may be an effort to show that the government is delivering on long-standing ANC resolutions ahead of the NGC.

While South Africa’s fiscal conundrums have steadily worsened over the last decade, there is no doubt that this will be a make-or-break budget for South Africa’s final investment-grade credit rating from Moody’s (which is to announce its ratings decision in March). Also important will be whether South Africa sinks deeper into junk territory in the assessments of Fitch and S&P. While Mboweni seems to have no room to provide real upsides, he may try to convince markets that 2020’s budget will be the nadir of South Africa’s fiscal crisis.

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