Today’s Medium-Term Budget Policy Statement (MTBPS) is finance minister Malusi Gigaba’s first chance to show how he intends to get a proper grip on the country’s finances. From the perspective of the ratings agencies, it is probably also his last.
Unless he comes up with credible solutions for how a R40 billion to R60 billion revenue shortfall will be made up, how state-owned enterprises will be reformed and how government will moderate spending, the country’s sovereign debt rating will almost certainly be downgraded at the end of the year.
“Gigaba’s natural inclination is to not pick a side,” says Investec Asset Management’s Nazmeera Moola. “But we’ve gotten to a point in the macroeconomic fiscal space where that option is no longer available. Either he’s going to come up with something plausible and credible that is going to annoy a lot of people in cabinet, or he’s going to try to fudge the whole thing and its going to be blatantly apparent, and we’re going to be downgraded. I’m hopeful that he opts for the former, but I’m not putting a high probability on it.”
Who is he addressing?
The problem Gigaba faces is that he has to choose which masters to please.
“The finance minister is in a difficult position, because it depends who his audience is,” says Moola. “If it’s ratings agencies, funders and markets he can’t afford not to provide budget consolidation over a three-year time horizon. He can’t afford not to be cutting expenditure and raising revenue.
“But I’m not convinced his audience is only his funders,” she adds. “Politically, his requirements are much more complex. The ability to cut expenditure in the current environment where there is speculation about whether or not he will remain finance minster is much more difficult.”
A finance minister’s priority would usually be to keep bond holders happy, but Gigaba’s ability to do this seems very constrained.
“If his focus was to ensure that South Africa can sustainably continue to issue debt, I think he would make decisions that would involve a far tougher budget,” says Moola. “But I’m not sure he has the political space or political courage for that.”
Honesty is the best policy
Chief economist at Alexander Forbes Investments, Lesiba Mothata, argues that this MTBPS has to be about re-establishing credibility.
“Gigaba can’t be on the fence,” he says. “There is no longer room to hide because now the tide has turned against him. There are no longer tailwinds like those that came with corporate tax revenue last year. He has to be very transparent. He has to be very clear. That will create credibility even if what he says is negative in that he is talking about a shortfall of $3 billion, tax hikes for personal income earners, and so on.
“And I still have the confidence in the institution that Treasury will be able to do that,” Mothata adds. “They will give him that counsel. They will still maintain the credibility that they have. They have been doing it for many years now.”
It is however not just enough that Gigaba says the right things. There has to be clear evidence that there is follow-through.
“We’ve been talking about fiscal consolidation for a while now, and in my book that means making things better,” says the Efficient Group’s Dawie Roodt. “But things haven’t been getting better. They have been getting worse.”
The fiscal deficit is increasing, state revenue is under growing pressure, and government’s debt as a percentage of GDP continues to climb.
“Everything is moving in the wrong direction,” says Roodt. “And unless we make very difficult decisions now, we will not be able to stop this runaway train. I’m very concerned that we are close to being pushed over the edge.”
Roodt however does still have confidence that Gigaba and government can make the right decisions.
“Winston Churchill said about the Americans that you can always expect them to do the right thing, after they have exhausted all the alternatives,” he says. “And that’s where we are now too.”