- Finance Minister Tito Mboweni’s supplementary budget – presented today, 24 June – was as bleak as expected.
- The finance minister coated the terrible fiscal picture in tough talk about the longer-term need for consolidation, but the emergency budget leaves many loose ends, some of which will only be clarified in October’s mid-term budget.
- Despite talking up overdue structural reforms and infrastructure to boost South Africa’s post-Covid-19 economic recovery prospects, today’s budget seems short on concrete evidence.
The numbers were as bad as expected. The Treasury now expects the economy to contract by 7.2% in 2020 (a touch worse than the South African Reserve Bank’s latest forecast but still at the more optimistic end of the forecast range amid the pandemic). The National Treasury now projects the consolidated budget deficit reaching 15.7% in 2020/21, while the main budget deficit, forecast at 6.8% in February’s 2020 budget, is now projected to reach 14.6% of GDP this financial year. The primary deficit is expected to deteriorate from -2.6% of GDP forecast in February to -9.7% in 2020/21.
Debt consolidation promise
Gross national debt is expected to reach 81.8% of GDP in 2020/21, compared with February’s projection of 65.6% of GDP. Warning of a looming “fiscal reckoning,” Mboweni promised that debt would stabilize at 87.4% of GDP in 2023/24, a slight departure from previous speeches, which have painted a picture of runaway debt over the course of the decade.
Mboweni resorted to a biblical reference to exhort South Africa (and especially his own party) to choose “the narrow gate” over the “wide gate” that leads to ruin and bankruptcy. However, the steps towards this stabilization will only be set out in the 2020 Medium Term Budget Policy Statement (MTBPS), as will Mboweni’s expected pledge of zero-budgeting. A promise that cabinet has “adopted a target of a primary surplus by 2023/24” offers little consolation without clear evidence of where spending adjustments (to the tune of about ZAR 230bn over the next two years) will come from. In relation to one of the greatest fiscal liabilities – state-owned companies (SOCs) – the budget review document acknowledges that the financial performance of [SOCs]… is likely to deteriorate in 2020/21,” while their ability to borrow in capital markets will be even more constrained. Given the deterioration of public finances – well ahead of the pandemic – and the government’s extremely slow progress on long-overdue reforms, the onus will be on the government to avoid that Mboweni’s words of warning turn out to be prophetic: “The wide gate is a passive country that lets circumstances overwhelm it.”
Given that both fiscal and structural reforms have progressed at a glacial pace to date, the attitude towards today’s announcements should be ‘seeing is believing.’
Issues and questions
The government now intends to borrow about USD 7bn from international finance institutions to fund April’s ZAR 500bn (USD 29bn) Covid-19 relief package. While the National Development Bank (NDB) approved its widely expected USD 1bn loan on 19 June, IMF emergency funding has yet to be confirmed. The size of the funding need, and promises of primary surpluses and zero-budgeting, could generate speculation that South Africa may ultimately target a full IMF program. However, political resistance within the ANC will be so intense that the Ramaphosa administration will likely avoid providing any clear signals for as long as possible.
The speech was almost completely silent on public sector wages, which were the finance minister’s main savings pledge in February. Mboweni merely mentioned that Minister of Public Service and Administration Senzo Mchunu is negotiating with labor, which shows how little progress has been achieved since February’s annual budget. Today’s budget review mentions that “cabinet has reiterated support for the proposed public-service wage bill reductions announced in February” (which were ZAR37.8bn in 2020/21, ZAR 54.9bn in 2021/22 and ZAR 67.5bn in 2022/2). Everything still hinges on the mediation process getting under way this week and its outcome will show whether Mboweni’s envisaged savings will prove realistic, at least for this year.
Today’s budget also seems to defer most SOC-related questions until the MTBPS. Other than a ZAR 3bn allocation to the troubled Land Bank, there are no other in-year spending adjustments for SOCs. Notably, the supplementary budget was silent on plans to create a new airline out of South African Airways. Yet this is unlikely to be the end of the story, which will remain a bellwether of government’s appetite for SOC reform. In relation to power utility Eskom, Mboweni seemed to complain about slow reform progress and warned that “Eskom will need to show progress in meeting the milestones as laid down in [the government’s electricity] Roadmap.” While he described this a “non‐negotiable,” there is little reason to believe that the government will withhold already-budgeted financial support.
Social grant relief
More than 18mn South Africans have received a temporary Covid‐19 grant, according to the Treasury. The grant top-ups and special grants are due to end in October, but a big question will be whether the Ramaphosa government will have the appetite to remove these vital benefits in the face of unemployment reaching 30.1% in Q1 (prior to the pandemic) and local elections looming in 2021.
As expected, infrastructure is being talked up as the answer to South Africa’s low-growth quagmire, amid limited other options. Yesterday, 23 June, Ramaphosa said at the inaugural Sustainable Infrastructure Development Symposium (SIDSSA) that the government intends infrastructure to be the “fly wheel” around with South Africa’s economic recovery is built, with 55 “bankable and shovel-ready” infrastructure projects in the pipeline. Mboweni’s speech duly echoed this but was short on detail. Private sector participation will be crucial and green infrastructure bonds are being touted.