On the evening of November 24, Moody’s and S&P will release their ratings review, providing us with the last economic sense check before the highly anticipated December ANC Congress. Like many South Africans, I will be staying up late to find out whether our economy will get a downgrade or a stay of execution.
As we approach this day, the most important question that we will need to ask is whether we have seen enough signals from the government to avoid a downgrade and buy more time.
Have we at least begun to right the ship for a path towards economic reform and recovery? Have we sent the right signals to the investor community? These are all critical questions that needed to be answered by the government long before the 24th.
Perhaps the most important test was by Finance Minister Malusi Gigaba’s first and most important Medium Term and Budget Policy Statement (MTBPS) that he delivered on 25 October. Unfortunately the medium-term budget sought to avoid the tough decisions that needed to be made.
There was significant criticism aimed at the 2017 MTBPS, and rightly so. However, Minister Gigaba was accurate in one respect: it represented a detailed account of the perilous state of our country’s public finances and the rapid deterioration of our fiscal outlook compared to what was outlined in the February 2017 Budget.
The facts are sobering: revenue shortfall of R51 billion; increasing debt-servicing costs that are estimated to grow at 11.0 percent per annum, to 15 percent in three years; growth target for 2017 down from 1.3 percent to 0.7 percent; a 4.3 percent deficit projected for 2017/18.
Our country’s budget deficit, prior to borrowing for 2017-2018, will rise to 4.3 percent from the 3.1 percent target set out in February, while spending is set to be R3.9bn higher than expected.
These are certainly not the signals we want to send to the investor community. The fiscal slippage we witnessed in the MTBPS was incredibly worrying, not to mention that the revenue shortfalls (R51bn) is the largest gap since the 2008-09 financial crisis.
In early June 2017, the ratings agencies were very clear about their concerns. They highlighted the following risks: low GDP growth, rising government debt and postponement of debt stabilization, the March cabinet reshuffle as undermining the progress of the State-owned enterprises (SOE) corporate governance, the (likely) costly nuclear programme and political tensions that increase risk to progress on fiscal consolidation and growth-enhancing measures. We can say, with certainty, that many of these risks remain today, some have even been exacerbated.
Gigaba may have said the right things around structural reforms, policy certainty, responsible government and anti-corruption measures, but we saw little details and the trust deficit only widened.
SOEs remain a major source of fiscal risk and a potential downgrade. Despite a new board at South African Airways (SAA), we are yet to see a real and comprehensive turnaround plan. Fiscal transfers to SAA as well as the South African Post Office would reach nearly R13.7bn. It’s unclear who the strategic equity holders will be to support the turnaround of SAA, and definitely unclear how the government will convince these investors.
Which leaves us to the political risks and lack of good governance within government. These remain a serious threat to a downgrade. As recently as November 9, Moody’s highlighted that South Africa’s outlook for 2018 remains negative, largely due to the country’s politics. Politics continues to upend and distract from any economic revival or reform plan.
The resignation of Michael Sachs, the head of the National Treasury’s Budget Office, was another blow to one of the most important institutions in our country. This raised serious concerns over the politicisation of the Treasury and budget process.
In addition, the latest inquiry set up by President Zuma to look into tax administration and governance at the SA Revenue Services is a further example of political distractions. The inquiry, under normal circumstances, should be a welcomed development, but many view it with a sense of trepidation. The writing is on the wall.
Reading between the lines from the MTBPS, it’s clear that the Treasury has already factored in the real possibility of further rating downgrades of our local currency debt.
The question has never been if we are getting a downgrade but when.
Of course, rating agencies like business were expecting a tangible action (plan) and update in the MTBPS in a clear path and way forward.
It is fair to say that there was a lot of talk strengthening institutions, driving growth and fostering economic inclusion but no real execution.
Published in Business Report (16 November 2017)