Can Pravin Gordhan’s grand vision be implemented?
In a bid to win back the trust of both investors and ordinary South Africans, the resurrected finance minister has set out to make the economy kleptoproof.
Pravin Gordhan acknowledged several times in his budget tabled in Parliament on Wednesday that South Africans’ generally high rate of tax compliance requires the government to reciprocate by spending funds efficiently and transparently.
But restoring faith in the state is no easy feat, as patronage, corruption and wastage scandals continue to make national headlines.
Top of the public’s mind is probably the hundreds of millions of rands spent on the security upgrades to President Jacob Zuma’s Nkandla homestead, which was recently revisited in the Constitutional Court when Zuma finally offered to pay back (some of) the money.
Concerns also abound over whether correct procedures were followed in awarding tenders to the Gupta family, whose close association with Zuma has become a particular target by opposition parties.
The ANC, South African Communist Party and Cosatu alliance has also added its voice to the issue, calling for a plan to deal with businesses and individuals who try to influence public policy.
Zuma’s critics believe he fired former finance minister Nhlanhla Nene because he refused to sign off on a deal relating to Zuma’s pet project, SAA, and stonewalled his ambitions for the country’s nuclear future. Both deals are seen to potentially favour Zuma’s family members or their associates.
In a post-budget briefing on Thursday morning, Gordhan asked why honesty and integrity had left South Africa’s business culture, warning that the country risked becoming a kleptocracy if things did not improve.
“We need to know, for every R100?million we drop at the top, how much of it reaches the people on the ground,” he said. Parties in the middle are taking more than their due, he said.
In the budget, Gordhan listed a raft of measures to get a bigger and more transparent return from public money. These seek to restore faith in the ANC-led government and include the new centralised tender system. Centrally negotiated contracts using the new e-tender portal will be mandatory from April, he said in his speech.
He also told media on Wednesday that, despite public perceptions, state-owned entities are not sacrosanct and will be tackled – boards and mandates will be reviewed to ensure maximum efficiency.
The treasury announced this week that the chief procurement officer will now watch over state-owned entities’ procurement plans and supply chain processes, and will review all contracts above R10?million to ensure value for money and reduce wastage and irregularities.
In fact, the treasury said, the office of the chief procurement officer has been reviewing contracts valued at more than R10?million since June last year. This, it said, includes Eskom’s coal-supply contracts, some of which are linked to the Gupta family.
Regarding the ailing SAA, the treasury proposed bringing in a minority equity partner after restructuring improves the finances of the troubled national carrier.
Ralph Mathekga, the head of political economy at the Mapungubwe Institute for Strategic Reflection, said such reform packages require a really credible government to implement them. If the government wants to improve tax collection, it will need to restore its legitimacy, he pointed out.
“Government has lost its legitimacy. It cannot be seen as prudent,” he said. This lack of credibility affects revenue collection, he said, citing the government’s inability to collect e-toll fees as an example.
“Government is very much on the defensive. The ability to rally support behind them when making unpopular decisions is not there. The legitimacy is not there.”
Now in question is whether the state has the capacity and ability to enforce the budgetary ambitions.
The budget, Mathekga said, seeks to appease all stakeholders within certain political constraints. But whether it is enough to avoid a credit rating downgrade to junk status has elicited a mixed reaction.
Gordhan gave the international credit rating agencies many of the things they wanted.
Not only did he cut public expenditure, he has also increased the pace of narrowing the budget deficit. He will begin to stabilise and reduce the debt-to-gross domestic product (GDP) forecast over the medium term.
But he managed to hold on to politically popular big-ticket items such as continued support for social spending and increased subsidies for higher education.
But it might not mean much if Gordhan can’t stoke growth.
Rating agencies warned in December that they would look at a downgrade for South Africa if growth did not improve in line with their expectations. In the budget, the treasury’s economic growth forecast for this year is 0.9%, and 1.7% for 2017.
Much of the economic weakness cannot be solved domestically. South Africa is feeling the pain of persistently low commodity prices and a recovery in the United States that has weakened the rand and other emerging market currencies.
But the rating agencies are equally concerned about South Africa’s role in aggravating weak growth, mainly because of its failure to implement policies that will encourage investment and boost the economy.
Nazmeera Moola, an economist and strategist at Investec Asset Management, said: “South Africa desperately needs to see proper, tangible action on structural reforms.
“These [actions] include making headway on labour and education reforms, doing away with undue bureaucracy in small business, improving management and delivery in state-owned entities, [and] engaging in pragmatic trade negotiations.
“We are encouraged by the announcements the minister has made in relation to the [revision of] visa regulations and progress on the awarding of independent power provider contracts, but we need action now,” said Moola.
In addressing concerns for future growth, Gordhan emphasised that the government’s communication with the private sector has been re-energised and was a “soft factor, but not an unimportant factor” in this budget.
Speaking at a breakfast briefing on Thursday morning, Deputy Finance Minister Mcebisi Jonas said the real consideration now is how to ignite growth. The key factors underpinning the county’s previous growth model – commodities, cheap labour and cheap electricity – have all changed, he said.
Finding a new approach is “a conversation we need to have”, Jonas said. “Fundamental to that is to ensure the private sector invests.”
Moola said the measures are enough to stave off a rating downgrade for now.
But many market analysts didn’t think they went far enough to reassure investors, and the markets did not respond favourably on budget day. The rand dropped by 3% at one point and the government’s 10-year bond yield climbed from 9.13 to 9.33.
Putting this budget together was always going to be an extraordinarily difficult task, said Nic Borain, a political consultant to BNP Paribas South Africa.
Although analysts believe the budget was not enough to appease the market, “the error might be those with expectations of more significant reforms”, Borain said.
“In the lead-up to the budget, it seemed as if the market and commentators forgot Pravin Gordhan is an old ANC person … and so he will follow the discipline and dictates of the party as a whole.”
Mathekga agreed: “This is an ANC budget. Gordhan can deviate piecemeal with rhetoric. But this is not his budget. Treasury does not design policy, it funds policy.”
The speech presented itself as a cautious budget in a difficult time, said Borain. In the detailed budget review, which is more closely read by the people who lend South Africa money, this balanced approach was also emphasised. But there is an obvious lack of clarity.
“Treasury didn’t say where the money [an additional R15-billion in each year] is coming from in 2017-2018 and 2018-2019. The omission is a political omission in an election year,” said Borain. “I don’t think the ratings agencies are going to miss that trick.”
Sure enough, Kristin Lindow, the senior vice-president of Moody’s, in a brief media statement noted that revenue measures to plug the deficits in those years have not been identified.
But Lindow said Moody’s viewed the budget as one that aims to deliver faster fiscal consolidation while preserving growth-supporting capital spending. The agency described the planned tax increases as “well targeted, given the weak economic backdrop”.
But Moody’s noted that the treasury’s revised growth forecasts are still slightly more optimistic than Moody’s own predictions of 0.5% for 2016 and 1.5% for 2017.
On Thursday afternoon, Standard & Poor’s said the budget has not immediately affected South Africa’s rating and no action is warranted. It noted the faster pace of fiscal consolidation but said it considers this still vulnerable to lower-than-expected GDP growth and shortfalls in revenues.
“The announced budget lacks significant policy announcements that we think would immediately spur GDP growth or provide much-needed business confidence to the private sector,” the agency said.
“Efforts in this regard continue to remain limited, particularly in labour relations, where strikes have in the past inhibited higher GDP growth and have the potential to do so this year again in the mining sector.”