SA needs credible fiscal consolidation for confidence and growth
Reducing public-sector wage growth is the only policy option that can offset reduced revenues according to the Institute of International Finance
The SA government needs to achieve “credible” fiscal consolidation, notably by reducing public sector wages, if it wants to boost business and consumer confidence enough to improve growth in the coming years, the Institute for International Finance (IIF) — the global association for the financial industry — said in a report on Monday.
The institute, which is expecting SA’s economy to grow at just 0.3% in 2019, its lowest in a decade, said that reducing public-sector wages appears to be the “only policy measure that could offer a sufficient offset to revenue underperformance and help stabilise public debt”.
In its baseline scenario for growth, the institute expects an agreement between the government and unions in line with inflation for the next three-year wage agreement period starting in April 2021.
Though this would weigh on public-sector employees’ disposable income and consumption, “such fiscal consolidation measures could prevent a Moody’s downgrade, bolster confidence, and keep borrowing costs from rising,” the IIF said.
In an optimistic scenario, slower growth of the public wage bill would improve business and consumer sentiment even more, and economic growth could reach 1.6% and 1.8% in 2021 and 2022, respectively, the institute said.
It warned, however, that a failure to introduce a credible fiscal consolidation package would deteriorate sentiment further, leading to weaker growth and higher public debt.
In October’s medium-term budget policy statemente, finance minister Tito Mboweni, outlined the deterioration of SA’s finances with government debt expected to rise to 71.3% in the coming three years, while the budget deficit is expected to average about 6% during this period.
Mboweni said SA needs to achieve R150bn in savings over the next three years to stabilise government debt levels. Much of this is expected to come from savings on the wage bill, but public-sector unions have rejected moves to reduce the salaries of public servants.
Credit ratings agency Moody’s Investors Service — which cut its outlook on SA government debt from stable to negative after the medium-term budget — has stressed the need for convincing fiscal consolidation in the February 2020 budget to avoid a downgrade. Moody’s is the only ratings agency that still rates SA at investment grade.
In its review, however, Moody’s highlighted the rising concerns that the government would not find the “political capital” to undertake the reforms it needs to lift economic growth.
The country is only expected to grow by 0.5%, as per National Treasury forecasts, rising to 1.2% in 2020, and 1.6% and 1.7% in 2021 and 2022, respectively. But after the economy shrank by 0.6% in the third quarter of 2019, and Eskom introduced further rounds of power cuts at the start of December, there is rising concern the country could slip into a recession.
According to the IIF, low economic growth is the root cause of SA’s problems and is driven by four factors: falling public investment resulting in deteriorating infrastructure; subdued private investment due to weak business confidence and unreliable electricity supply; a shortage of skilled labour, despite high unemployment; and deteriorating export competitiveness.
The institute warned that recent bouts of load-shedding, that saw Eskom cut an unprecedented 6,000MW from the grid on December 9, have worsened the outlook for growth.
“If sustained, power shortages will reduce output meaningfully,” the IIF said. “With fiscal challenges leaving very little scope for higher public investment any time soon, Eskom’s operational performance is unlikely to advance in the near term, despite its efforts to improve maintenance.”
Private-sector investment, which has picked up in the past two quarters, along with an uptick in banking lending, particularly to companies, offers a small sign of hope, however. These factors “suggest that capital expenditures may provide further support to the economy”, the IIF said.
Nevertheless, it cautioned that business confidence “remains at a depressed level, raising concerns about the sustainability of positive contributions to growth from private investment in coming years”.