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June 22, 2020

SOUTH AFRICA: Emergency budget – fast lane to the fiscal cliff?

BY Anne Frühauf

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( 5 mins)
  • Finance Minister Tito Mboweni’s adjustment budget – due on 24 June – is expected to forecast the budget deficit climbing to more than 14% of GDP.
  • Immediate questions will revolve around how April’s ZAR 500bn stimulus package will be financed, which will include the reprioritization of existing spending and external financing from lenders like the IMF.
  • Also under scrutiny will be whether the government sends any convincing signals regarding long-overdue structural reforms and other efforts to boost anemic growth (most likely on the infrastructure front).

According to a presentation leaked over the weekend, the National Treasury now expects the budget deficit to balloon to more than 14% of GDP in 2020/21, compared with its February forecast of 6.8%. With the South African Reserve Bank now projecting a deep GDP contraction of about 7% (which still seems at the more optimistic end of the forecast range amid the pandemic), South Africa’s already-bleak debt-to-GDP ratio is certain to deteriorate drastically. While February’s budget projected that debt to GDP would reach 71.6% by 2022/2023, this is now expected to climb to 90.9% that year and – without additional revenue or spending measures – to 113.8% of GDP by 2028/2029.

Budget reprioritization and funding

The most immediate question will be how Mboweni will fund April’s ZAR 500bn (USD 29bn) Covid-19 relief package. Since the largest chunk is a ZAR 200bn loan guarantee scheme that does not require spending allocations, attention will focus on the promised reprioritization of ZAR 130bn from existing budgets. This will likely focus on cutting departmental budgets, particularly arts and tourism spending, and perhaps freezing vacancies.

Of about ZAR 170bn of new funding required, some ZAR 95bn is expected to come from the International Monetary Fund (IMF), the New Development Bank (NDB), and the World Bank. The IMF emergency funding could be confirmed soon after the emergency budget, but the extent of increased bond issuance will also be scrutinized.

Moreover, the Ramaphosa administration is unlikely to provide clear, longer-term signals regarding the possibility of a full IMF program. Even if President Cyril Ramaphosa saw the writing on the wall, he would be very unlikely to support Mboweni sending strong signals (other than a warning) any sooner than is necessary, given the significant backlash that the mere mention of a condition-laden IMF program would generate within the ANC alliance.

Loose ends and wrong priorities?

Another critical budgetary issue – public sector wages – seems no closer to a resolution than it was at the time of the February budget when Mboweni sold wage bill containment as the centerpiece of his savings agenda. Although the government has refused to implement the wage hikes due from 1 April, a mediation process – with unions representing workers manning the pandemic frontline (nurses, doctors, teachers, and police officers) – is due to begin this week. If talks were to fail, public sector unions would stand a decent chance of forcing the implementation of the binding three-year wage agreement via the courts. This means it is still uncertain whether Mboweni can realize the budget savings promised for this year.

Equally large looms the question of whether the government’s willingness to throw good money after bad state-owned enterprises (SOEs) could diminish amid the pandemic shock. Although Mboweni may try to avoid additional allocations for South Africa’s biggest fiscal burden, Eskom, on Wednesday, a plan to create a new airline out of South African Airways (SAA)’s ashes looks set to receive additional funding. While the ZAR 26bn headline figure quoted in media reports is somewhat misleading (as it includes existing Treasury commitments), any further funding allocated to SAA might be considered a bellwether for all public enterprises and as incriminating evidence of the government’s failure to get serious about SOE reform, despite ever more crippling fiscal constraints.

Debt path

The elephant in the room is whether the Treasury can provide any indication of how it proposes to bring runaway debt onto a more sustainable path. Mboweni failed to do this in February when political resistance to austerity ran high. In hindsight, these were much more benign conditions. Political allies are now demanding stimulus to the tune of ZAR 1tn, and the national emergency may make it even harder to lay out how to control public debt gradually. That said, Mboweni’s speech will likely warn in harsh terms about an impending sovereign debt crisis by the mid-2020s. He may also reiterate his recent call for zero-budgeting. It would be classic Mboweni: courageous but hardly reflective of the political consensus in the cabinet or the ANC. Without clear evidence that the budget process will change, a reference to zero-budgeting would have little credibility.

Growth quagmire

Finally, the argument that South Africa desperately needs to boost its anemic growth rates has never been truer. Yet, there is little sign that the government is seizing on the pandemic-induced crisis to get serious about reforms. There does seem to be political consensus on the need for infrastructure investment, as the only available option to boost growth. One day before the budget, Ramaphosa will host the inaugural Sustainable Infrastructure Development Symposium (SIDSSA). Mboweni’s speech will likely reference the infrastructure drive as well, though the details will probably be scant and the financing questions huge.

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