SA has run out of time and a financial crisis looms within months.
The state is currently spending R50 billion a month more than it is getting in, and it is becoming increasingly difficult to fund this deficit.
This is the view of RW Johnson, thought-provoking writer, historian, academic and political analyst. He revisited his old question – How long will SA survive? – in a webinar organised by Holborn Management Services.
He believes Finance Minister Tito Mboweni’s mid-term budget in October will be the “big showdown” between the realities of our economic situation and government’s failing political ideologies. Mboweni has promised big changes, says Johnson, but government is in a deadlock that makes decisive decisions impossible.
“SA has had a generation of ANC rule, but the ANC has failed to govern trustworthily,” he says. “We have seen six years of falling income and most state-owned enterprises are in a state of bankruptcy.
“Unemployment has tripled. The number of people who have access to clean water is now lower than in 1994. The ANC has not delivered a better life for all.”
It is telling that the moderator of the virtual presentation noted that nearly 800 people watched it. Holborn partner Mark McAllister said that Johnson has penned two books, five years apart, posing the same question about SA’s future. “RW has predicted SA’s junk status, the worsening debt situation and an IMF bailout,” he said. “And here we are again.”
Johnson has come to the conclusion that SA will hit the wall as far as government finances go in 2021, maybe stretching the inevitable to 2022.
The only option
As most people know, the only option to avoid the so-called fiscal cliff is to cut government spending sharply. Mboweni set a target to cut government spending by R230 billion, which seems impossible, says Johnson. “No cut in government spending has ever been greater than R70 billion.”
The targeted cut in government spending means nothing less than a reduction in the state’s wage bill. But the magnitude of the savings required suggests that lowering wages and salaries will not be enough. “We need to get rid of a lot of people,” says Johnson, “but it is politically impossible.”
Nothing has proved this point as much as the labour action by municipal employees in Gauteng – refusing above-inflation salary hikes while the rest of the country suffered devastating loss of income due to the coronavirus pandemic and lockdown of businesses.
Meanwhile, government continues to create unrealistic expectations and is making huge promises.
These include a state bank, an unaffordable national health insurance scheme, a basic income grant, a state pharmaceutical company, continued funding of unyielding and ineffective state-owned enterprises and, the latest, a basic grant for women.
Johnson says it is noteworthy that there is no word on the funding of all these “airy fairy” proposals.
“The basic income grant will cost R200 billion and the women’s grant R140 billion. Not even the R10 billion for the foolish idea of funding SAA has been made available yet.
“It is absolutely clear that there is a shortage of money,” says Johnson.
He reiterates that government needs to take decisive action, but the ruling party itself is divided and cannot make the very important decisions needed.
A divided party
“Historically, the ANC is not a party of unity. It was formed from different groupings right from the start. The only thing that united them was their opposition to white rule. This has since disappeared.
“It is the first time that the ANC president is not supported by a majority of the ruling party, putting SA in a very weak situation,” says Johnson, adding that SA is waiting for decisive leadership.
“It is noteworthy that [president Cyril] Ramaphosa has not publicly backed any of the economic plans. He talks very nicely, but there is no clear direction.”
Johnson says it will become increasingly difficult for government to fund its spending and the ongoing deficit.
Government bonds as an indicator
“We can see it in the interest rates on government bonds, where the rates on longer term bonds are significantly higher that shorter term bonds. The two-year bond is below 8%, 10-year bonds are sitting at around 9.3% and 40-year bonds at 11.34%. This exceptionally steep increase shows that the market does not believe we will be able to fund over the longer term.
“It will become increasingly difficult to fund the billions we need every month, week after week,” says Johnson, referring to government’s regular bond auctions. “The pressure to simply print money will increase. Not even trade unions will want to invest their money in a bankrupt airline.”
We must remember that SA is part of the world and we are deeply entrenched in the international economic sphere, dependent on foreign investment. In short, foreign investors need to change their dollar, euro, yen or whatever currency into rand.
Johnson says they continually ask themselves: “Do I really want to put my money into that currency? Do I want to put my money into that country? Is my money safe? Will I be able to remit my profit?”
Government won’t get money if our economic policies chase foreign investors away and our economy stagnates.
Johnson says government will probably end up doing a bit of everything – hope for a bit of economic growth, print more money, look at borrowing more and, lately, the big temptation of getting hold of some of the trillions of rand of pension money through the introduction of prescribed assets.
Lack of political will precludes taking the correct, courageous steps to put the economy on the right track.
The four essential reforms that are urgently needed have been touted for years, but are worth repeating:
- Reduce the size of government and cut the wage bill drastically;
- Liberate the labour market;
- Take tough action on state-owned enterprises and bankrupt municipalities; and
- Overhaul the education system to produce people we need in the economy.
These basic requirements have been debated often, but the debates always come to the same conclusion – that it is politically impossible.
Johnson says the unpopular decisions to effect real change are impossible because the ruling party will lose support, notably from labour unions and the South African Communist Party.
“The result is that SA is now facing a debt crisis,” he says. “We won’t be able to cut expenditure and we won’t be able to fund the deficit.”
When will it all come to pass?
Johnson predicts that we face a debt crisis in 2021, maybe stretching it to 2022.
The government’s approach to the International Monetary Fund (IMF) for a bailout is one way forward. With IMF funding, the country will benefit from lower interest rates and the forced cuts in expenditure will be bigger and tougher than if we do it on our own, says Johnson.
However, there is huge resistance to IMF loans, partly because of outsiders prescribing to government what to do and also because it is an admission of government failure. The result is that government will lose some of the support from its allies and end up controlling less of the economy.
State businesses and municipalities that are already bankrupt will not be able to function at all, akin to an inability of government to govern. “It is difficult to comprehend,” says Johnson.
He tried to end his presentation on a positive note, saying that a lot of countries have received IMF help. “The country will survive. It might look different, but countries survive,” he said.
The bottom line is the stark reality that SA has run out of money.