EDITORIAL: Mboweni, Kganyago go all-in on Covid-19
With the country facing its worst-ever recession, the Reserve Bank and the National Treasury have hauled out the big guns
With the country facing its worst-ever recession, the Reserve Bank and the National Treasury have hauled out the big guns. That fresh support is necessary is undisputed, but if a surge in spending and borrowing is not accompanied by a sea-change in the way the government manages the economy, the only result will be SA’s fiscal unravelling.
Governor Lesetja Kganyago and the Bank’s monetary policy committee holed up over the Easter weekend, recrunching the numbers. It now expects the SA economy to contract by a terrifying 6.1% this year, compared with its previous forecast of between -2% and -4%.
The prospect has been enough to make policymakers’ blood run cold. And the Bank, often accused of being slow and conservative, acted swiftly and unanimously. Despite the increase in country risk and collapse in the rand, it slashed the benchmark interest rate by another 100BPS in an unscheduled emergency meeting this week, following an equivalent cut last month. It takes the Bank’s total response to Covid-19 to over R600bn.
On the fiscal side there is a lot less space, but finance minister Tito Mboweni also appears to have dropped his initial restraint. Though Mboweni hadn’t revealed the full extent of his new fiscal package at the time of going to press, he is looking to borrow about $60bn, potentially from the International Monetary Fund (IMF), and is seeking cabinet permission to close SA Airways and SA Express, provide more support for small business and temporarily hike the child-support and old-age grants.
While the need for greater government support is unequivocal, it is less clear whether Mboweni can achieve what he’s promising — a large fiscal package to support households and firms, while safeguarding SA’s fiscal sustainability.
Mboweni declined to provide new growth and fiscal estimates, but the Bank has warned (based on its earlier forecast) that the 2020/2021 fiscal deficit could exceed 10% of GDP.
Mboweni says that given the crisis, a higher deficit may be accommodated if it is temporary, and if reprioritised spending is directed towards health care and direct fiscal support to the most vulnerable people. But he stresses that achieving faster growth has now become "non-negotiable".
For example, he says that SA must now implement energy reforms promised by President Cyril Ramaphosa, including reducing Eskom’s monopoly and relying more on renewable energy. "In the absence of urgent structural reforms, the considerable fiscal actions to mitigate the current crisis may leave the fiscus at the edge of a cliff," Mboweni warns. It is conceivable that Ramaphosa and Mboweni will successfully leverage the crisis to force through pro-growth reforms that have been stalled by policy bungling and political resistance. This would be extremely welcome, but it’s just too late — we have destroyed too much of the economy already.
In the run-up to the global financial crisis, the SA economy grew 5% on average for five years. In 2009, it contracted by 1.5% and shed 750,000 jobs. This time the outcome will be many multiples of that. But for the past five years, the economy has battled to grow above 1%. Jobs have vanished and tax revenue has plunged, because SA just isn’t competitive any more.
In short, SA was not fiscally sustainable before Covid-19. After the pandemic, which will destroy thousands more firms and jobs, it will be a lot less so. How SA recovers from this crisis depends on whether the government adopts an entirely new approach to managing the economy — one that puts growth above all else. We will know what path the government has chosen from whether the cabinet agrees this week to close SAA and permit Mboweni to borrow from the IMF. If not, SA will stagger over the fiscal cliff. As it is, we are teetering on the brink.