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October 28, 2020

Africa

SOUTH AFRICA: Is the MTBPS worth the paper it’s written on?

BY Anne Frühauf

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( 5 mins)
  • Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement (MTBPS) includes a less “active” stabilization of South Africa’s runaway debt than promised in June.
  • The government now makes even bigger promises on cutting the public-sector wage bill – a good signal but implementation prospects remain uncertain.
  • Other than an expected ZAR 10.5bn allocation for moribund South African Airways (SAA), the MTBPS makes no additional allocations for state-owned enterprises (SOEs), which seems quite unrealistic.
  • The Treasury will hope that its stance on the wage bill and SOEs will help it secure a USD 2bn loan from the World Bank, even if doubts linger over its ability to implement the MTBPS.

A less “active” debt stabilization path

Mboweni’s latest debt stabilization path is a little less “active” than his preferred scenario laid out in the June emergency budget, which envisaged “stabilizing” debt at 87.4% of GDP by 2023/24. President Cyril Ramaphosa’s economic advisory team had pushed back against the target as being neither credible nor desirable in the context of the depth of the recession, which the Treasury now projects at -7.8% this year – more optimistic than forecasts from the Reserve Bank (-8.2%) and many local economists.

Since June, Mboweni has reduced his overall target for spending cuts from ZAR 390bn to ZAR 307bn over three years and has deferred promises of reaching a primary surplus from 2023/24 to 2025/26. The cuts will affect all departments but aim to protect capital spending in aid of Ramaphosa’s Economic Reconstruction and Recovery Plan (ERRP). Yet the Treasury did not let go of the aspiration to present an upper ceiling for its debt ratio – now predicted to “peak” at 95.3% in 2025/26 – even though the precedent of the past decade suggests such targets hold little credibility. Many details around the spending cuts – as well as additional tax increases worth ZAR 40bn over four years – will only become clear in the February 2021 budget. Moreover, the outlook for South Africa’s economic recovery, debt ratios and record budget deficits – projected at 14.6% of GDP for 2020/21 and 10.1% in 2021/2022 – are worsened by renewed uncertainty over the trajectory of the pandemic, including fears of a second wave at home and fresh closures in key markets for South Africa such as Europe.

Cutting the public-sector wage bill

Even if doubts linger over its ability to implement the MTBPS, the Treasury will hope that its stance on the wage bill and SOEs will help it secure a USD 2bn loan from the World Bank. On the former issue, Mboweni’s spending cuts and plans to avoid a debt crisis hinge on cuts to the public-sector wage bill, where he has further upped the ante. The government now hopes to reduce the wage bill by ZAR 310.6bn over four years, which is far more ambitious than the February plan to cut ZAR 160bn over the next three years. This appears to cap public-sector wage bill growth to 1.8% for 2020 and an average of 0.8% between 2021/22 and 2023/24 and will also entail reviewing pay progression rules, occupation-specific dispensation allowances, and other benefits.

However, the question is the government’s ability to implement its even bigger promises. Since February, there has been little progress on implementing the ZAR 37bn cuts budgeted for this year. Reneging on the final leg of its three-year wage deal has landed the government in court against public-sector trade unions. Hearings at the Labour Appeal Court are due to start on 2 December, but a judgment, which could conceivably go against the government, could take months and may come only after the February 2021 budget. Worse, the stand-off also undermines the prospects of striking the next multi-year deal, prolonging uncertainty over the government’s ability to implement the promised cuts. The best possible outcome would be a negotiated deal between the Department of Public Service and Administration and the unions, though there has been little progress since February. The only hope is that the government’s leverage may have increased slightly amid the pandemic crisis: after all, millions of job losses in the private sector make it harder to justify public-sector wage increases and the government could use the threat of headcount cuts to extract compromises around wages.

State-owned enterprises

As expected, the MTBPS made an additional allocation of ZAR 10.5bn for South African Airways (SAA), which highlights how Mboweni was overruled by cabinet. Plans to raise the funding elsewhere have failed, which has meant cuts across ministries (including higher education and policing) to rescue an airline that has failed to make a profit since 2011. Perhaps to compensate for this, Mboweni’s team has not budgeted for any additional allocations over and above what was previously budgeted, including the biggest drain on the fiscus, power utility Eskom.

Yet deteriorating financial positions at many SOEs suggest that further bailouts are almost certain over the medium term, likely including the Land Bank, the National Roads Agency (Sanral) and defense parastatal Denel. Arguably the single biggest question remains the plan to reduce Eskom’s unmanageable ZAR 488bn debt burden. Mboweni merely said there were “ongoing discussions” about how to deal with Eskom’s debt, which would be resolved “in due course,” confirming how slow (and costly) the government’s handling of the debt problem has been.

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