Not all doom and gloom as budget gives cause for economic optimism
Stimulus plan, improved revenues and positive developments at state-owned entities could help Mboweni deliver upbeat policy statement
A year has passed since then finance minister Malusi Gigaba released his no-plan medium-term budget policy statement (MTBPS). This demonstrated a ballooning debt problem, while offering no solutions.
This week’s 2018 MTBPS gives us an opportunity to assess both the state of SA’s finances and the state of the National Treasury. While it certainly doesn’t feel that way to most, there is reason to feel a bit more optimistic about this year’s MTBPS, set to be delivered by our (very) new finance minister, Tito Mboweni.
SA is suffering from a severe case of depression right now. After the initial euphoria of Cyril Ramaphosa’s appointment as president it became clear the governing ANC was more focused on factional infighting than reform and growth stimulus measures. If there are any positives to take from the fact that SA has slumped into recession, it is that it is has forced the government to address the growth deficit head-on.
The stimulus plan announced by Ramaphosa in September contains little that is new — indeed, page six of the budget review in February set out a very similar series of reforms that would raise growth by two to three percentage points over the next five years, including changes to visa requirements to boost tourism; reforms in the telecoms industry and revisions to the mining charter. Unfortunately, political distractions resulted in no progress on any of those measures until October. Let us hope the politicians can stay focused enough following the recession to execute the stimulus plan.
A second reason to be marginally more positive about this year’s MTBPS is that despite weak growth, revenues seem to be running largely in line with the February budget. This is in sharp contrast to a year ago, when the revenue shortfall was projected to be just more than R50bn. The improved revenues are due not only to the VAT hike but also because the mix of growth in 2018 is more revenue friendly. In 2017, the bulk of the growth was driven by a bumper agriculture season, which doesn’t generate much by way of revenues. In 2018, agriculture is likely to subtract about 0.4 percentage points from GDP growth. With overall GDP growth now expected to average 0.8% in 2018, this means the nonagricultural sectors are growing about 1.2%.
Third, it is encouraging to note that progress, albeit slow, has been made at state-owned entities (SOEs). We’re seeing improved governance, an increase in confidence as plans are being drawn and acted upon, notably at Eskom, and renewed access to capital markets for some SOEs. In October 2017, we were warning about the impending liquidity crunch at Eskom. A year later Eskom again has some limited access to institutional capital. Development finance institutions are again willing to extend loans. Going forward, Eskom’s earnings before interest and taxes will continue to deteriorate, but a good portion of this will be due to the depreciation and amortisation from Medupi as those units come on stream. The result is that the utility is no longer facing a liquidity crunch.
Long-term solvency requires expenditure cuts, where there have also been some positive developments. Eskom will reduce capital expenditure R15bn and is aiming to cut about R10bn per annum from operational expenditure. Sector regulator Nersa has also granted it a reasonable claw-back over the coming years. With Eskom making progress, there is room for the government to focus on the other, much smaller, SOEs. These three factors all combine to paint an economic picture that is not only more optimistic than 2017, but is probably also a little more positive than how we are all feeling.
If SA’s finances face better prospects than they did a year ago, the institutional concerns have increased. The Treasury has been one of the major successes of the ANC government post-1994. It inherited a budget and an institution that were both in disarray, but with an enormous investment of time, effort and really good people the Treasury evolved into a major source of strength for the SA economy. However, the government under Jacob Zuma didn’t want a strong Treasury and spent a long time weakening the institution. This led to the removal of Nhlanhla Nene in December 2015.
Through 2016, the Treasury retained its strong skills that had been built over two decades, but Gigaba’s appointment as finance minister in late March 2017 started the exodus. Capable and sensible director-general Lungisa Fuzile left in early May. Deputy director-general Michael Sachs followed in November 2017. Beyond these high-profile departures, a plethora of highly talented people have resigned.
The Treasury has continued to bleed talented people in 2018. The ANC needs to decide if it wants a strong Treasury. If so, leadership is the solution. Does Mboweni’s appointment signal commitment to rebuilding the Treasury? He has many strengths, including being brave enough to take unpopular stances. That is needed at this juncture. However, one strength his tenure at the SA Reserve Bank did not exhibit was the ability to attract and build a strong team. That skill is desperately required if the Treasury is to be rebuilt. Others on his team may be able to fill that vacuum if he empowers them.
While stable finances and a strong Treasury are necessary to stabilise the debt outlook, neither offers the long-term solution. The recent survey produced by the SA Institute of Race Relations contained a very interesting insight beyond the supposed ramp-up in EFF support. It concluded that the issues people are most worried about are not in fact populist. Respondents were given a list of 12 concerns, from which they were asked to pick the most important to them. Only 6% picked land, whereas 30% listed growth and jobs. Concerns around drugs ranked as the biggest concern by 22% of the population. The land issue has been used as a political tool by both the EFF and Zuma factions within the ANC. While the rhetoric has focused on land, the electorate doesn’t seem to care that much.
The ultimate key to success and stability is growth. Growth will create jobs. Growth will boost government revenues and stabilise the fiscus. Growth will address the number one issue really concerning South Africans.
“Moolam is deputy MD at Investec Asset Management.