The bottom line and what we are going to do about it

Debt will now breach the 60% level. Growth is essential.
SA's tough economic environment is visible in the numbers. Picture: Chris Ratcliffe, Bloomberg

Government’s budget deficit and debt level numbers are scary and getting worse. While government has managed to curb spending over the next three years, this has been more than offset by allocations to Eskom to the tune of R23 billion a year and allocations to a new infrastructure fund (good news). As a result, the expenditure ceiling has been revised upwards by R14 billion in 2019/20, R1.3 billion in 2020/21 and R732 million in 2021/22.

However, the story is not all bad, with government taking steps to shift consumption-led expenditure to investment-led expenditure by tackling the wage bill and prioritising infrastructure spending, which should boost job creation and growth over the medium to long term.

Read: #Budget2019 in a nutshell 

The tough economic environment is visible in the numbers. The economy will grow by 1.5% in 2019, less than the 1.7% forecast, rising to 2.1% in 2021. Slower growth means revenue collection continues to underperform; it was R15.4 billion less than estimated in October. To bridge the gap between revenue and expenditure, government will borrow R15.3 billion more than planned, bringing borrowings to about R239.5 billion for the year.

South Africa’s total debt will reach R2.52 trillion in 2018/19, or 49.9% of GDP, increasing to R3.47 trillion or 55.5% of GDP by 2021/22. Net debt is expected to stabilise at 57.3% of GDP in 2024/25 and gross debt (which is less government cash) will cross the 60% threshold in 2023/24 thanks to efforts to stabilise Eskom’s finances.

Read: Wanted: Equity partners for Eskom Transmission

Gross debt to GDP outlook

Source: South African Reserve Bank and National Treasury

These look like small, incremental changes, but debt is a slippery slope. Sanlam economist Arthur Kamp points out that the 2017 budget projected that the debt ratio would peak at 52%.

“South Africa’s government debt ratio is not unusually large in the global context, but the problem is the trajectory. It jumped by almost 30% points since 2009, and continues to rise,” he says.

Read: Commuter costs set to rise as fuel taxes accelerate 

The cost of servicing this debt will rise to 4% of GDP by 2021/22, just ahead of the 3.9% projected in October.

Read: Funds for NHI to be redirected to improving health services 

Finance minister Tito Mboweni put it bluntly when he explained to the nation that the country will earn R1.58 trillion and will spend R1.83 trillion this year. The shortfall is R243 billion, which will be funded by borrowing. “Put another way, we are borrowing about R1.2 billion a day, assuming we don’t borrow over the weekend.”

It’s the cost of this borrowing that is killing us. The crucial difference between South Africa and many developed countries is that in the US and Europe, borrowing costs are historically low. “US nominal economic growth is around 5% and long-term borrowing costs only 3%. It makes sense for the US or European governments to borrow to fund long-term investments that will pay for themselves, such as infrastructure upgrades,” says Kamp.

Read: SA budgets for land purchases even as expropriation looms 

In South African nominal growth is 7% and the long-term bond yield 9%. “The arithmetic is as brutal as it is simple. Hence it is crucial to stabilise the growth in borrowing and boost GDP growth,” Kamp says. That is the bottom line.

How do we go about doing that?

A new, more business-friendly government emerges.

To achieve a higher rate of economic growth and job creation, which Mboweni lists as priority number one in his budget speech, the country needs to stabilise debt, convert its expenditure from consumption-led to investment-led, strengthen the capacity of the state, notably in implementing infrastructure projects; restructure state-owned enterprises (SOEs), notably Eskom, be more amenable to equity partnerships and sell non-core assets where necessary.

Read: #Budget2019: This is what you’ll pay

And the budget certainly talks the talk on furthering many of these objectives. “The private sector is the key engine for job creation,” Mboweni told members of parliament. “Government’s policy actions aim to end the uncertainty that has undermined confidence and constrained private sector investment.”

Additional detail was provided on the Infrastructure Fund that was announced last year. “We see this as a central pillar of the budget and of our reprioritisation [of spending],” says Mboweni. The fund will be created in partnership with the private sector, development finance institutions (DFIs) and multilateral development banks. “It will accelerate R526 billion of on-budget projects by bringing in the private sector and DFIs,” he says. “In several instances, the private sector will design, build and operate key infrastructure assets. In addition, government will contribute at least R100 billion over the next decade.”

Discussions are already underway with the Development Bank of Southern Africa (DBSA), the World Bank and the New Development Bank.

In addition, progress has been made on the president’s economic stimulus and recovery plan with the licensing of high-demand spectrum to begin this year, amendments to the immigration act to be gazetted, and the development of legislation for the oil and gas industry underway. In addition, Mboweni says that an export tax on scrap metal is being discussed, which one presumes is aimed at curbing the debilitating theft of copper and other metal from government infrastructure.

Read: #Budget2019 in 10 tweets

The budget also acknowledged how, in recent years, policy inertia and a deterioration in the relationship between government and the private sector has reduced South Africa’s global competitiveness. The country has fallen from 44th (2007) to 67th (2018) on the Global Competitiveness Index. And between 2008 and 2018, South Africa’s ranking fell from 35th to 82nd in the World Bank’s Ease of Doing Business report.

Over the same period, countries such as Kenya and Rwanda have made gains in competitiveness by implementing rapid reforms. Kenya’s rollout of e-visas has boosted tourism while Rwanda has enacted regulatory changes, enabling investments in broadband that improve quality, reduce costs and expand access.

The budget set a new goal: to reverse this slide and move to the top 50 countries in the Ease of Doing Business rankings within the next three years.

Other structural measures mentioned, without much detail being added, include a focus on improving public education, which is essential if the country is to improve economic potential.

Union antagonism aside – the government also aims to press ahead with the restructuring of the electricity sector and SOEs in general. “Isn’t it about time the country asks the question: do we still need these enterprises? If we do, can we manage them better? If we don’t need them, what should we do?” Mboweni asked his colleagues in parliament.

Read: Tito Mboweni’s complete budget speech 

Ultimately the policy objectives outlined in the budget must succeed in shifting investor and business sentiment such that private sector investment rebounds. Investment fell by 0.3% year-on-year in the first three quarters of 2018, following a 0.7% expansion in the same period in 2017. Investment by private businesses and general government declined.



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And what do our economists expect Moodys to do?

All things considered its actually a good budget, and it say and hints at all the right things (almost), will it be enough to stave off a downgrade?
We will have to wait and see.

I agree. This relatively strong stance by the Ramaphosa faction will unite the looters who oppose these prudent measures. We can expect more shouting from the unions and the anti-Ramaphosa factions in the ANC. Ramaphosa nailed his colours to the mast now. Many in his own party are now planning to ambush him.

One thing is for certain – if patriots believe this is a good budget, the treasonous looters in the ANC will think this is a horrible budget.

Hi Sensei, here I have to get in my “I told you so”, moment. When Ramaphosa made his “climate change is a huge concern”, it was clear what was ahead. We have been slapped with a carbon tax which will increase every year. It is not ring-fenched and not linked to any environmental goals. We are taxed for using fuel not of the right grade, while there is no cleaner fuel on sale. Climate change “concerns” by governments (and many private enterprizes) are just excuses to run more money making rackets. We are being fleeced, while drowing in plastic and choking on polluted air.

@Griet, of course there is a alternative (for individuals at least), buy yourself a EV.
The Tesla model 3 which is coming later this year will have a price tag similar to that of a GTI and you can do 300+Km on a charge.

The new and much improved Nissan leaf is also about to lunch in SA, and of course we have had the i3 for a long while now, and that is a car that has also recently received some welcome upgrades in terms of range etc, just a bit too pricey for me.

PJJ, I usually travel a 1000 km to the Cape area when I can escape the waterless, powerless and lately Telkomless Kumberley. Might as well get myself an ossewa for the time it will take me!

@Griet, no problem, pre-order your Tesla Roadster now, and you will be able to do your 1000KM trip on one charge 😀

I am positive MOODY should relax

Yeah, let’s hope Moody’s doesn’t soon “load shed” SA’s last investment grade!

No focus in the budget on the people side of the equation.

The equation is a focus on high economic growth and low population growth, as successful countries like China and Singapore do.

Definition of unemployment is when you have – more people – than jobs.

The increase in population growth, in poor areas, and illegal immigration, makes a mockery of job creation.

Debt to GDP leaves us deep in the brown stuff. Good that we are therefore allocating more to toilets!!

The point here, I believe, is that despite all the good words can government deliver. Despite CR leading the way the fundamentals of the cadre system remain in place – if the ANC knew Eskom was broken in 2008 and did nothing why should it be different this time? And what about the cost of bailing out all the other SOEs – having a get together to discuss what should be done will not solve the cash drain over the next three years. And how will government sell the need for reductions in manpower costs to the unions? If CR behaves like Thatcher he may succeed – but the social unrest and dislocation that would accompany it will be much worse than the UK endured. It’s concerning – let’s hope CR is a lucky President!

Yes, the labour unions are indeed going to be an obstacle against expected staff cuts at SOE’s.

Maybe not paying salaries for a while, citing funding problems, or bring in “pay shedding” (e.g. getting your usual pay, every 2nd month) should bring the union members to their knees(?)

Union members in SA have the ability to absorb pain that is incomprehensible to most company management.
In the early days (mid 80’s) of legitimised unions the listed company I worked for was “striked”. No work no pay was strictly enforced, no strikers received a cent. For the first couple of weeks production records were bettered, everybody pitched in and morale was at a high.
Eleven weeks later management caved and the work force returned, seemingly non worse off than before .
My perception of the strikes over the last 30 years or so is that the strikers can outlast anything that management can come up with under current law.
Labour legislation needs to give managment a half-chance – now they have no-chance.

Heaven forbid a global recession or Emerging market crisis.
> Those debt estimates will rise another 20%.

Heaven forbid economic growth!
> We don’t have electricity for it.

The cat’s out the bag and non of Cyril’s roadshow investors will commit. We’ll have to wait another 5-10 years for new power to be added before we are allowed to grow again.

In the meantime, hedge your investments for a few more years while Tito and friends try figure out his rhetorical questions today…

Do we still need these SOE enterprises? If we do, can we manage them better? If we don’t need them, what should we do?”

I think some in Govt cicles now realise that the “social experiment of AA/BEE” has becomes economically unsustainable, and unwilling to admit it. But it’s let to continue, otherwise the ANC will lose power.
It will cost all taxpayers dearly in future years, and when that is not enough to cover the state’s debt, the massive capital in the private retirement fund industry/asset management will bail Govt out…once most of that is used up, the SARB will print money like a-la-Zim, and then once the ZAR is worth nothing…national debt will finally be defaulted upon. International funding will dry up. Govt will cease to operate / proper regime change. Thoroughly African country in “look and feel” teh end result.

Very easy to predict, as there is one or two neighboring countries serving as economic role models.

At least it will happen in relative slow motion over the next decade or two. The downward trend can be reversed: IF govt adopt policies to be pro-business/drop income tax rates / remove cost of doing business / curb labour unions / end AA/BEE / restore rule of law (effectively), drop crime & attract skilled westerners (irresrective of colour or religion) into SA…then you have upward economic trend. The alternative is the current pro-populist trend, chasing skilled people abroad (skilled people make economies grow, in case Govt has forgotten!) and my prediction of events will play out. Economics will dictate that. It’s simple….examples are there & civilsation do not learn from historic mistakes.

At least we have enough time still to enjoy great SA lifestyle. Make sure your money emigrate in the meantime…

End of comments.




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