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