EDITORIAL: Debt keeps heat on Godongwana

SA has been on such a consistent downward path marked by worsening economic growth and debt metrics that it has become common to describe every coming budget as a make-or-break moment. So much so that the term has lost its meaning.

It was so when Tito Mboweni made a return to the cabinet late in 2018, replacing Nhlanhla Nene, who had stepped aside when details of undeclared meetings with the Gupta family emerged.

The build-up to Mboweni’s first budget, in February 2019 (the medium-term budget policy statement he presented in October 2018 had been prepared by Nene’s team) was dominated by whether SA would do enough to prevent the loss of its one remaining investment grade credit rating.

That budget was not such a moment after all, and neither was the next one, in February 2020. It took the arrival of Covid-19 and the lockdown in March before Moody’s Investors Service pulled the trigger on SA, an act it repeated about eight months later. Then the concern was how much worse SA’s fiscal position would get.

Thanks to a boom in commodity export earnings, finance minister Enoch Godongwana will be faced with a more forgiving setting. There will be no talk of impending crisis or make-or-break moments. He might even allow himself an opportunity of self-praise for his government’s handling of the crisis. But that will be misguided as very little of the improvement has had to do with any decisions that have been made by politicians.

This is not a time for SA to be complacent. The country’s debt, estimated to have reached 70% of GDP in 2021, is well above the levels that are deemed to be sustainable for emerging markets, and it is set to grow further. While not as bad as the double-digit estimates in the wake of the Covid-19 outbreak, deficits running at 7% of GDP are nothing to be celebrated.

Despite all of this, there will be pressure to spend. The debate on the basic income grant is far from settled, though economists accept that a semi-permanent extension of the Covid-19 emergency social relief grant is inevitable. With President Cyril Ramaphosa having already said it will be extended for a year after its expiry in March, it is hard to see the government removing it then a year ahead of an election. And after that, there will be other reasons to stick with it.

The president’s own advisers, at least some of them, have already warned that a permanent extension of welfare spending — funded either through more borrowing or higher taxes — risks damaging exactly the people it is supposed to help. But that has never stopped politicians before, especially when they can smell a chance of losing power.

Mboweni might have won the battle against public-sector  unions on wages, but then the price that was paid was a one-year agreement, as opposed to three years, with its promise of more instability. We already know from the IMF Article IV report earlier this month that allowances for civil servants may not be one-off. 

Godongwana’s medium-term budget policy statement in November was widely welcomed in the market even though it had kicked many important decisions, most notably on welfare spending, down the road. Markets liked what he had to say about having to show “tough love” to failing state-owned enterprises (SOEs) and stop them being a drain on the fiscus.

This is the one spot in the budget where there might be a loss of credibility. None of the SOEs can be said to have improved since then and it is more likely than not that it will have to loosen its stance and make more provisions.

What will ultimately determine the future is not in Godongwana’s hands, though he will talk about it a lot. He will use the speech to prod his colleagues in an attempt to get them to push on with growth-boosting reforms. That is the only way the country can push for more spending, while preventing a fiscal crisis that many see as inevitable.