OSAGYEFO MAZWAI: The budget must commit to reducing debt

SA will be on tenterhooks as finance minister Enoch Godongwana delivers the final budget policy statement of the current administration later today.

We have seen some highs and lows over the years, and an austere budget this time may be one way to reignite confidence in the seriousness with which we take our fiscal finances, and to revive the relationship between the state and the private sector.

The private sector will invest in SA if there is concrete evidence that the state is able to put politics aside and put us on a firmer fiscal path, irrespective of the sacrifices that may need to be made.

There was much optimism when Cyril Ramaphosa was elected president of the republic. A new dawn was envisaged as a path of not only renewal of SA but also an era of growth. Over the years stagnant growth has had a negative effect on our fiscal position, but also on the extent to which the private sector can grow profits, build bigger enterprises and create jobs.

The jobless rate (32.1%) released by Stats SA this week highlights the severity of unemployment in SA, and the detrimental effects that slow growth, energy insecurity and logistics constraints are having on society in general. Recent news that some mining companies have indicated an intention to initiate retrenchment proceedings has  put this issue in sharp focus.

We remain cognisant of the devastating effects of the Covid pandemic on the economy, but it cannot be denied that structural issues are the main contributors to economic stagnation. While many economies battled the same pandemic, issues pertaining to weak growth are more accurately defined as emanating from high inflation and high interest rates.

Yes, inflation was in part a spillover effect of the pandemic, but it is worth mentioning that Europe in particular experienced harsher inflation due to the Ukraine conflict given many countries’ reliance on Russian gas. We must be more accurate in defining the source and cause of our issues, and reject from misrepresentation of the facts.

As we head to today’s budget presentation we remain cautious about what it will bring. Revenue projections are expected to be missed, while expenditure is expected to go up. Raising money through taxes is risky, particularly in an election year, and we cannot be oblivious to that dynamic.

GFECRA

But the thing on everyone’s radar is the Gold & Foreign Exchange Contingency Reserve Account (GFECRA), which recognises the realised and unrealised gains or losses from changes in the value of SA’s foreign exchange and gold reserves and has a surplus of about R540bn at present. This has arisen mainly from rand weakness over the past few years, and which has been touted as a source of funding that could be tapped to alleviate SA’s fiscal situation.

Given the fiscal situation it is likely that GFECRA will be used as a “lifeline” of sorts. In that respect one hopes the account will be used in the main to pay down debt. Interest expenditure as a percentage of the budget remains uncomfortably high and eats away at a budget that should be used for delivery of services and infrastructure investment. Savings on interest expenditure could be used to pay for the facility itself (known as sterilisation).

SA’s elevated debt level has serious consequences. Paying down debt frees up cash flow for growth enhancing initiatives, and through those initiatives we could  reduce our debt over time. This emanates from potentially higher nominal GDP (as a function of more robust economic activity) and higher tax collection (arising from increased profitability of firms), which should be driven primarily by structural reforms and infrastructure investment. 

The GFECRA should not be used to fund general expenditure, which would not give comfort to bond holders and foreign investors and would push up borrowing costs. The budget must take heed of the need to tackle the underlying and systemic issues facing our country. I agree with the recent sentiments expressed by the CEO of Business Leadership SA, Busisiwe Mavuso, when she said strict conditions and a proper framework must guide the use of the GFECRA account. 

The minister will need to give comfort to bondholders on managing SA’s fiscal finances, and more specifically the fluidity and liquidity within the borrowing mandate.

We are also aware of the vulnerability of the rand-dollar exchange rate in the event of a GFECRA withdrawal given the reduced reserve coverage. Convincing structural reforms and a tight framework could lead to the appreciation of the rand against the dollar, which would lead to losses on the GFECRA account, but better growth outcomes and tax collections can offset that. A sustainable and suitable buffer should be part of the broader framework for the withdrawal. 

The budget must avoid a situation where SA lives beyond its means, which will lead to an unsustainable fiscal path. Risks to the rand must be properly considered, such that initiatives envisaged are rand positive or at least accretive. We worry about a weaker rand and its negative  effect on inflation expectations that could manifest in higher public sector wage growth demands and translate into higher government expenditure, a slippery slope we want to avoid.

• Mazwai is investment strategist at Investec Wealth & Investment International.