RW Johnson analyses the Finance Minister's supplementary budget statement
June 24th was supposed to be showdown day on which Finance Minister Tito Mboweni would have to draw the financial consequences of the Covid-19 disaster and the debt mountain resulting from it. In the run-up to this date there were a number of advance indicators.
Mboweni himself gave a briefing to Nedlac at which he spoke of this year's budget deficit having reached 14% of GDP, compared to the (already high) 6.8% he had forecast in February and he also spoke openly of the looming threat of a sovereign debt crisis and an IMF bailout.
President Ramaphosa in his weekly message “From the desk of the President” struck a new and very downbeat note. Gone was all the guff about a wonderful new, fairer economy being born amidst the ashes of the old. Instead Ramaphosa spoke sadly about the fact that there would be job losses not only in the private sector but in the public sector too.
Hitherto he had promised faithfully that there would be no retrenchments in the public sector. It was easy to imagine that Mboweni had briefed him on just how bad the situation was and the need for huge cuts in public expenditure.
At the same time Ramaphosa picked up the themes announced by the SACP and emphasised the dominant role of the state in launching a recovery. Here again came the simile of a post-war reconstruction with rather hopeful allusions to Marshall Aid – pointless as ever, for there is no longer a George Marshall in the wings. For its part Cosatu declared that it wanted to see Mboweni launch a massive spending programme of “at least a trillion Rands” - in addition, of course, to bailing out SAA and giving public servants another inflation-plus wage increase.
The interesting thing about this was that Cosatu knew perfectly well that the government was out of money. So, quite clearly, the implication was that it should find an extra trillion and more simply by getting the Reserve Bank to print more money. One realises that if, by any chance, the Bank were to do this Cosatu would immediately produce a wish-list for all manner of other expenditures to be funded in the same way.
Bheki Ntshalintshali, the Cosatu General Secretary, weighed in with an attack on the Bank as “captive to the narrow interests of the rentier financial capitalists” whereas the “workers and citizens (are) the real owners of the bank”. He also insisted that the Bank should ensure “the redistribution of wealth and income to all South Africans as mandated by the Freedom Charter”. This is an interesting formulation: the Freedom Charter was a party document from 1955 with no standing in South African law, while the Bank's independence is guaranteed by the Constitution, which is the law.
Finally, there was the intriguing fact that the negotiations with the IMF over the $4.2 billion Covid-19 loan were surprisingly protracted. Given that this loan carried none of the tough conditionalities attendant upon a bailout loan, this could only be about the fact that the IMF required a statement from the borrower as to how they were going to restore fiscal balance.
This was a minimal requirement simply to ensure that the borrower would be in a position to repay the loan but of course no such re-balancing plan had ever been drawn up – in effect the Treasury has just allowed the debt to grow and grow, apparently hoping like Mr Micawber that “something will turn up”.
Given the now enormous size of the debt any such plan would necessarily have to provide for huge spending cuts and/or major privatizations of SOEs. The Treasury would have political difficulties in drawing up such a plan and, even more so, in getting it through the cabinet – which may have accounted for some of the delay. It is, of course, essential that this plan be published and debated in Parliament as soon as possible: it is a major international commitment which will guide public policy for years ahead.
Then came June 24. Mboweni announced that the budget deficit was now estimated at 15.7% of GDP and that by the end of FY 2020-2021 the total debt would be 81.8% of GDP. A key point in all such calculations is that one really needs to allow another 11%-12% to cover guarantees which the state has given for the debts of the SOEs which, as we know, the SOEs have no hope of paying off on their own. In addition there are large numbers of bankrupt municipalities which would like the state to take over their debts too.
Mboweni then did a curious thing. In effect he insisted that it was essential that steps be taken immediately to stabilise and then reduce this debt. But he then made no move to do so. Instead he provided two scenarios, the first a “passive” scenario (ie. continued drift) which would, within four years bring total debt up to 100% of GDP, at which point a sovereign debt crisis would occur and the country's economic policies would be turned over to IMF direction.
Secondly, Mboweni averred, one could adopt an active policy of (unspecified) structural reforms and zero-based budgeting which, together with tax increases of R40 billion over four years, would result in stabilizing the debt at 87.4% of GDP by the end of 2023-2024, after which budgets would have to run primary surpluses (ie. before allowing for debt interest) for many years so that the debt could gradually be paid down. With that thought Mboweni then kicked the can down the road. Zero-based budgeting would start in July and the new policy would be unveiled in the Medium Term Budget Policy Statement due in October.
And that was that. To be fair, zero-based budgeting is an enormously demanding exercise in which every spending item in every department has to be reviewed and re-evaluated. The Left has already made it clear that it doesn't like the sound of this so one may assume that many pitched battles lie ahead. Moreover, the task of driving the necessary structural reforms has been left to the deputy minister, David Masondo. This is quite hopeless. Any structural reforms worthy of the name are bound to be hotly contested within the cabinet and a deputy minister cannot possibly be expected to win such battles.
Reading between the lines
There are a number of points to notice here. The first is that Mboweni clearly faced a hostile majority in cabinet. Given what we know of Cosatu's position it is easy to imagine the attitude of the SACP ministers and the Zuma and Magashule camp. Indeed, it is difficult to imagine anyone in cabinet backing real structural reforms. Faced with this Mboweni's tactic is to keep reminding them that to continue blocking such reforms will result in a sovereign debt crisis and an IMF bailout. But he's not willing to waste his time pushing reforms against such resistance: that dirty job has been left to a junior.
Meanwhile, Mboweni has already ruled out resort to quantitative easing and he made no mention of prescribed assets. This disposes of two of the other palliatives canvassed by the Left. They are only palliatives: they would not deal with the real problem, would risk hyperinflation, break faith with pensioners and damage investor confidence. Diplomatically, Mboweni also remained silent about the fact that NHI, a state bank, a sovereign wealth fund, a state oil company and a state pharmaceutical company are now all dead ducks.
Second, Mboweni spoke of tax increases of R40 billion over four years. Since the deficit in this year alone is reckoned as R761.6 billion, R40 billion over four years is not very much to the point. It is abundantly clear that the old policy of just increasing taxes to pay for whatever the government spends has been exhausted.
Thirdly, Mboweni drew an eloquent silence over SAA, SA Express, Denel, the SABC and the other SOEs all begging for bailouts. Mboweni doubtless knew that most of the cabinet want to save SAA. He regards that as a complete waste of money and therefore made no allowance for it. Meanwhile he gave only R3 billion to the bankrupt Land Bank, which had asked for R22 billion – emphasising just how tight money was.
The problem of credibility
There seems little doubt that Mboweni's statement must have been a reasonably faithful copy of the plan for fiscal stabilization that he has just put to the IMF. Certainly, if his statement had differed from that he would have had to answer some awkward questions. This presumably also accounts for his silence on SAA and other SOEs, for the IMF would have doubtless regarded plans to throw more money at them in the midst of the Covid-19 crisis as less than serious.
But Mboweni's calculations are extremely optimistic. If, by the end of FY 2020-2021 (during which time nearly 22% of the entire budget will have been spent on debt interest) the debt amounts to 81.8% of GDP. Mboweni then reckons that the debt can be stabilised at 87.4% of GDP at the end of FY 2023-2024. That seems very ambitious: in the three years ending in 2024 the total debt will thus increase by only 6.6% of GDP. Yet before the lockdown the debt was due to increase by 6.8% in a single year.
Moreover, Mboweni assumes that a debt crisis begins only when the debt reaches 100% of GDP. That is ridiculous: the IMF and World Bank think that for a middle income developing country like South Africa, 60% of GDP is the safe maximum. It is extremely doubtful whether South Africa could bear a debt burden of even 90% of GDP for at all long. It is even more doubtful that there would be political support for an endless period of austerity to allow for primary budget surpluses, year in, year out.
Business South Africa is already clearly worried whether it will prove possible to finance the deficit this year. Already the sell-off by foreign bond-holders means that now only 31.5% of South Africa's debt is held by foreign investors – instead of the more usual 40%. And since investors of all stripes are now leery of buying South Africa's ten year bonds (who can be sure South Africa won't default long before then ?), the authorities are already depending more and more on selling short-term debt, a risky strategy. Whether the market will really fund such a debt will not be answered in four years time but in this current year.
And that is now. But all of Mboweni's economies this year depend on him successfully resisting the pay increase the public service is suing for. What happens if they win their case? The debt would suddenly increase by another R161 billion, the Rand would collapse and interest rates would shoot up. The only way out for Mboweni would be to retrench many thousands from the public service. And he is counting on another R230 billion of savings in FY 2021-2022. SADTU and NEHAWU have both argued that the bulk of these savings would again have to come from slashing the costs of the public service. They are probably right.
But it is also what needs to happen as the recent study by the Resep unit at Stellenbosch University shows. Above inflation increases for teachers have gradually consumed all the other items in the education budget – infrastructure spending, maintenance, equipment etc, until finally the only way to keep on paying teachers more is to leave more and more headships and teaching posts unfilled. At the end of this process expenditure per pupil has actually fallen (while pupil-teacher ratios increase) despite a continually increasing education budget, the disastrous result of giving in to SADTU. The same forces are at work everywhere in the public service. In effect complete priority has been given to raising the consumption levels of public servants with no regard at all paid to the public ends they are supposed to serve.
A sharp reversal of this policy would, of course, cause a major row in cabinet for the creation and sustenance of the bureaucratic bourgeoisie is the ANC's central project and raison d'etre. It is not certain that Mboweni would prevail. It is sobering to realise that the bulk of the other economies that Mboweni will need to find will also have to come from cutting back the cost of the public service. Given that their salaries account for a whole half of government revenue, it cannot be otherwise.
Moreover, with the economy due to shrink by over 7% and the government not looking like making the necessary reforms, it is likely that the ratings agencies will downgrade South Africa's credit status again. This would tend to push up bond rates even further, making the debt more expensive.
Too little, too late ?
What this all boils down to, of course, is that the government should have started to slim down its expenditure many years ago. Because it opted instead for drift Mboweni has been left with the almost impossible job of turning around the supertanker in just a few years. It is doubtful that he has enough time. Both Moody's and Fitch have already made it clear that they don't much believe in Mboweni's debt stabilization plan. Since Standard and Poor are generally reckoned to be the rating agency tough guys it seems certain that they will concur with that judgement – or go even further.
This poses an awkward question mark over the R4.2 billion IMF loan on which Mboweni is depending. With all the ratings agencies and innumerable financial analysts claiming that Mboweni's fiscal stabilization plan is not credible, can the IMF really decide that it is credible and hand over the money? If they demur, Mboweni will suddenly be short of R72.5 billion. Moreover, an open vote of no confidence by the IMF would have disastrous consequences.
One small chink of light is that the government is now willing to countenance the possibility that the investors apparently interested in buying SAA should be allowed to take a majority share, with the government becoming a minority shareholder. But the cabinet has decided it definitely wants to save SAA: “The cabinet believes a restructured airline will pursue the transformational agenda, such as the lack of opportunities for the advancement of black pilots after 26 years into our democracy.”
This is truly crazy thinking, as if the whole point of an airline was to give opportunities to a handful of black pilots. One can't help wondering if the government realises that once they cede management control to private investors they will not be able to insist on objectives such as this. One is reminded of how PW Botha wanted to privatize the railways on condition that the government should retain management control of them. There were no bidders.
But there is a more immediate problem. No plan for the re-launch of SAA can get off the ground unless the government pumps a good deal more money into the bankrupt airline. Imagine if the $4.2 billion IMF loan does come through. That money is supposed to be used to deal with the effects of Covid-19. If the government then uses a great chunk of it to prop up SAA, the IMF will shout foul at this frivolous diversion of funds. If, on the other hand, the IMF Covid-19 money does not come through, there will certainly be no cash available for SAA.
So where does this leave us? An elementary point about governance is that if you do not carry out necessary reforms in good time you will end up trying to make them all at once under the worst possible circumstances. This is exactly what the ANC policy of drift has produced with Mboweni needing to cut public sector employment at a point when unemployment has already gone well beyond the ten million mark.
As one looks at the mountain that Mboweni now has to climb one realises that the project of carrying out domestic reforms and expenditure cuts in order to avoid an IMF bailout is probably doomed. It's not just too late. The fact is that to succeed the government has forcibly to trim the bureaucratic bourgeoisie which is its own sociological heart and which also happens to constitute most of the remaining membership of Cosatu. The requisite structural reforms are anathema to most of the ANC and to succeed the government would need to maintain a prolonged austerity programme in the face of mass and rising unemployment.
Just possibly something like this could be attempted if a strong and authoritative president was driving it but Ramaphosa is a ditherer and the weakest leader the country has had since PW Botha introduced the executive presidency in 1984. Faced with the protean problems of the SOEs it seems almost comical that he has now brightly announced the setting up of an SOE Council.
Mboweni may well already realise that his plan is doomed. But the politics of the situation are such that he has to argue for a purely domestic programme rather than admit the virtual inevitability of recourse to an IMF bailout. The DA is in exactly the same situation, producing the odd position that both the government and the Opposition have decided to argue for a course of action which they likely know to be impossible. But in fact Mboweni has given us all a clue by saying action is imperative and then doing nothing: the tried and trusted policy of drift seems likely to win through yet again.