THE BIG STIMULUS: How SA can fund it, and how to spend it
The optimal funding solution is a combination of short-term external funding and a great deal of self-help
President Cyril Ramaphosa did a stellar job shutting down SA. As difficult as that was, the really hard work starts now. So how does he make sure the bulk of the economy is operational when the lockdown ends?
Unlike many other countries in the world, SA has announced limited fiscal stimulus. The problem is that after 10 years of Jacob Zuma’s mismanagement and corruption, the country has little room to increase spending in this crisis. This is in stark contrast to SA’s ability to respond to the global financial crisis in 2009, when the benefits of having built up fiscal space could be clearly seen. The long-forgotten February 2020 budget forecast a main budget deficit of 6.8% of GDP, before any Covid-19 response was envisaged.
Does SA need a stimulus package?
While it may be difficult to find the money, it is vital that SA enacts a Covid-19 relief package – one that comprises significantly more than has already been announced. Most emerging markets have announced packages of 2%-5% of GDP. The large developed countries have so far provided fiscal packages of 12%-15% of GDP.
Adding up all the measures that SA has announced gets us to 0.7% of GDP at the most. Without more, there will be a great deal of short-term and long-term pain as many poor South Africans experience dramatic income loss and the country experiences a long-term loss of productive capacity that will result in both widespread job losses and an eroded tax base.
Therefore, supplementary spending at this point is needed to ensure the state is able to raise sufficient revenues in the longer term to support those South Africans in need and to keep the bulk of public servants employed.
How should the money be spent?
There are some principles to guide this supplementary spending:
- All spending should be ring-fenced into a special Covid-19 budget. The funding for this needs to be understood clearly ahead of time.
- The package should be of a significant size – and announced relatively soon to have the biggest benefit.
- The spending must not be recurring. It needs to be one-off. Given the state of SA’s finances before Covid-19, we cannot afford any recurring expenditure. Therefore, all spending needs to be targeted at easing the pressure from Covid-19, the lockdown and the resulting recession.
- The spending needs to be efficiently disbursed. It cannot be reliant on government departments that do not have the experience or capacity to make decisions on individual firms, as this will take far too long. Or on government departments creating new mechanisms to support poor people. The government should be looking at using existing mechanisms like the SA Revenue Service (Sars) to disburse the wage support payments from the Unemployment Insurance Fund (UIF), as the UIF’s capacity appears limited.
- The bulk of spending should be targeted at retaining (and boosting) productive capacity – in other words, businesses that employ people. This will ensure that the long-term growth potential of the economy remains intact. The risk in this situation is the wholesale destruction of companies, and thus jobs and the tax base. I would suggest that at least two-thirds of spending should be targeted at protecting productive capacity.
- To support business, the banks need to be used as a key mechanism to direct both soft loans and grants.
- The support provided to business needs to be conditional on the benefits being passed on. Landlords need to provide relief to cash-strapped tenants. Businesses need to retain as many workers as possible and pay their suppliers in as timely a manner as possible. Banks should publish a list of all beneficiaries of the support and the government should establish an ombudsman to police this.
- Covid-19 relief should be available to all tax-compliant businesses that have been impacted, regardless of ownership structure. We need to retain as many jobs as possible, which means retaining as much productive capacity as possible.
While adhering to these eight principles, there are three key areas that require direct fiscal support at this point.
First, the provision of health-care equipment to protect workers and to dramatically ramp up testing. An intensive testing and tracking programme is how SA exits lockdown. Implementing this quickly in conjunction with the private sector needs to be the priority.
Second, to support vulnerable workers, many of whom are in the informal sector and will not benefit from the payments the UIF will make when it resolves its systems issues. Given the capacity constraints of the state, it is important that any such support utilises existing and functioning mechanisms. A group of economists recently proposed a top-up in the child support grant as the best mechanism “to support precarious households”. A mid-month top-up grant of R300-R500 per month for the duration of the lockdown would alleviate a lot of pressure for low-income households.
Third, support for businesses to retain productive capacity. If there is a widespread closure of businesses due to the lockdown, then many more low-income workers will be left without incomes on a long-term basis. This support can take the form of cheap loans from the banks that are backstopped by a first-loss tranche from the National Treasury. In effect, part of the stimulus would be channelled into a structure that would underwrite bank loans to qualifying businesses. The qualifying criteria need to be simple and transparent and capture as many small businesses as possible. For example, those businesses employing more than a certain number of people whose revenue fell by more than two-thirds during the crisis would qualify.
How to fund the stimulus – and the tax shortfall from the plunge in growth?
One of the key requirements for any Covid-19 supplementary budget is clarity on the funding mechanism. We also need to take into account the fact that the lockdown will leave SA’s GDP contracting by between 5% and 7% in 2020. This is unprecedented and will result in a massive shortfall in tax revenues of around R200bn relative to the February 2020 budget forecasts.
As a result, SA essentially has four options.
The first one is to ramp up local bond market issuance. There is some capacity, particularly at the shorter end of the yield curve. Yet, it will be difficult to raise a further R300bn (R100bn for stimulus and R200bn for tax shortfall) in the fiscal year that just started on April 1 2020. More pertinently, it will be almost impossible to raise it in the short period required for the stimulus spending.
The second is to turn to the multilateral lenders, including the New Development Bank (NDB, also known as the Brics bank), the World Bank and the International Monetary Fund (IMF). SA has already announced that it will access $1bn from the NDB to support health expenditure. Although 90 countries have already applied to the IMF for support in this crisis, the IMF is considered to be prime evil in SA.
It is true that many of the structural adjustment programmes the IMF has historically implemented have left large scars on countries. Notwithstanding the past, the thinking in the institution has evolved significantly, particularly in the wake of the Asian crisis in the late 1990s. The emergency credit lines which the IMF is currently offering come with limited conditionality and do not result in any loss in sovereignty. The IMF has also been exploring other mechanisms with its members. And the IMF loans typically charge low or zero interest rates. This should be an option that SA actively pursues – if only for bridging finance.
The third option would involve bilateral loans from one of the larger countries in the world. In all likelihood, this would be either the China or the US. At this juncture, China is likely to have more bandwidth to process such a request – though any such loan would come with its own conditionality and risks.
The optimal solution would involve some combination of the three options.
The local bond market is the longer-term solution
In the long term, the local bond market should be the primary financier of the SA government. One of the best protections the country has is a very long-term debt profile that is primarily denominated in rand. This combination provides a great deal of protection in a crisis. The government needs to ensure that it is able to borrow in the local bond market at affordable interest rates.
The best solution is to implement the Treasury’s growth plan, “Towards an Economic Strategy for SA”, which it published last August. The plan offers the long-term answers – and all the relevant bureaucrats in the departments of public enterprises, communications, water, minerals & energy, labour and trade & industry should be furiously trying to figure out how quickly they can implement the plan. We need to stop arguing about it and execute it.
Implementing “Towards an Economic Strategy for SA” would boost growth in the longer term. After an initial bounce, SA’s growth rate never recovered from the 2008/2009 global financial crisis. The deterioration in confidence caused by the Zuma regime was the ultimate problem that has had long-lasting effects.
The government needs to ensure that this pattern does not repeat after the Covid-19 lockdown ends. The efficiency of the lockdown has burnished the credibility of the government. This should be built on by implementing badly needed reforms.
If we see concrete progress on enough of the measures in “Towards an Economic Strategy”, SA bond yields would begin moving lower, thus lowering the country’s borrowing costs. Tangible progress would also make it viable for the government to issue a Covid-19 bond to ultimately fund the stimulus. Such an instrument should be tax free to increase its attractiveness to retail and institutional investors while also lowering the government’s borrowing cost.
Bridge financing is needed in the short term
In the short term, SA needs bridging finance of at least R250bn. External financing is needed. The IMF in its current incarnation is likely to impose far fewer hard and soft conditions than a bilateral loan. It is encouraging to hear Enoch Godongwana, the ANC’s head of economic transformation, say: “Both the World Bank and the IMF have provided facilities without the normal stringent conditions that they used to. In my opinion, this would be the best time to approach both institutions for a loan as they start giving developing economies a break to get through the coronavirus epidemic.”
The optimal funding solution is a combination of short-term external funding and a great deal of self-help to boost potential growth and retain the confidence created by the capable handling of this crisis by Ramaphosa and his government.
SA needs a significant stimulus package of at least 2% of GDP, equating to R100bn. This is not possible without external funding. To ensure the external borrowing is short term, tangible progress on structural reforms is needed to facilitate local bond market issuance, which could include a special tax-free Covid-19 bond. All spending needs to be ring-fenced, one-off and primarily focused on protecting the economy’s productive capacity.
*Moola is head of SA investments at Ninety One
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