Talk of state spending rings hollow
The ANC’s proposed economic stimulus package to boost growth and possible plans by the government to pump more money into ailing parastatals comes at a time when the state has very little room to manoeuvre.
This was highlighted in a report released by rating agency Moody’s, which warned that the state is likely to miss its fiscal consolidation targets set out in February’s budget, in part because of weaker than expected economic growth and a rising public sector wage bill.
It also pointed out the risks posed by rising interest payments on government debt and any potential support to state-owned entities (SOEs).
The rand, in an already turbulent week, fell about 3.34% to R14.73 against the dollar after the release of the report on Wednesday and other gloomy data, notably retail sales, which surprised the market with a paltry 0.7% growth year on year.
The poor retail figures have raised the spectre of another technical recession. When considered alongside the most recent mining and manufacturing figures, it is likely that the economy entered a technical recession in the second quarter of 2018, FNB senior economic analyst Jason Muscat said in a note.
The Mail & Guardian reported last week that the proposed stimulus package could cost about R48-billion. Announced by President Cyril Ramaphosa, it includes plans to increase investment in public infrastructure, support for entrepreneurship and employment opportunities for young people, women and small and medium enterprises.
Following the announcement, weekend media reported that the state is also contemplating more support for several SOEs, including the South African National Roads Agency (Sanral), SAA and the South African Post Office.
But the treasury has stressed that the stimulus will be done in a manner that maintains fiscal prudence and will be funded by the reprioritisation of existing budgetary resources.
The state is already battling to find another R30-billion over the next three years since June’s public sector wage settlement, which was significantly higher than what was budgeted for.
The state was already overstretched going into this year’s February budget because it had to find additional money to fulfil former president Jacob Zuma’s unexpected announcement in December of free higher education. To pay for that, taxes, and most notably value-added tax (VAT), had to be increased and municipal infrastructure spending had to be cut.
The M&G reported last week that the state is considering laying off about 30 000 public servants to reduce the wage bill, although Public Service and Administration Minister Ayanda Dlodlo denied this in a statement. She did say,however, that as “part of a larger plan to reorganise government”, measures such as employer initiated severance packages and early retirement without penalties are being considered but the government “is yet to engage labour unions on the matter”.
Lucie Villa, a Moody’s vice-president and co-author of the report, said in a press statement: “Growth this year is expected to be lower than the government’s own estimates, weighing on tax revenues, while the public sector wage agreement in June also brings extra, unbudgeted costs.”
Nevertheless, the long-term fiscal outlook had only marginally deteriorated, according to the report, and the government is still expected to reach its budget deficit target by 2020-2021 and for its debt to stabilise at 56% of gross domestic product (GDP).
But rising interest costs, making investors more risk averse in emerging markets, and potentially more state support for the SOEs were the chief risks to its forecasts, Moody’s said.
Economists have misgivings about the government’s ability to deliver a stimulus package, particularly given the existing demands on the budget.
Investec’s Nazmeera Moola said the state needed to create the environment to support growth. “Austerity has become a bad word but the current methodology, which is to increase taxes and increase spending, is clearly failing,” she said.
If the state was serious about stimulus, it needs to control employee compensation, which the wage settlement showed it had “no ability to do. There are no easy choices here but we seem to be making bad ones at the moment and there seems to be no clear coherent plan in place,” Moola said.
Nedbank economist Dennis Dykes said that, for any stimulus to be budget-neutral, the government would have to make cuts elsewhere. “I honestly don’t see a lot of slack in the budget to extract from elsewhere.”
There was a risk that a stimulus could become “dead spending” and have a neutral or even negative effect, he added, because the government was typically less efficient
in its spending than the private sector.
Moola said any possible injection of funds, or further support for SOEs, could not come without vast improvements in governance, although some state agencies such as Sanral had proved to be efficient and able to deliver the infrastructure it had promised, despite the controversy surrounding the Gauteng freeway improvement project.
The post office had increased its efficiency and improved its governance and appeared to have a business plan that could make it viable in the long term, she added.
But providing more support for the SOEs poses a perennial risk to the government’s finances. According to Moody’s, state guarantees on SOE debt has reached 11% of GDP, with Eskom having the largest exposure at 6.5% of GDP. Any default could lead to lenders calling in their debt, with enormous implications for the budget.
It is estimated that the state’s contingent liabilities, predominantly its guarantees to the SOEs, could go above R795-billion this year.
“We are treading a very fine line between trying to manage fiscal consolidation and trying to keep SOEs propped up,” Muscat said.
Moody’s was the last remaining ratings agency to rate South Africa’s locally issued sovereign debt at investment grade and it might give the government the benefit of
the doubt and wait until after the outcome of next year’s elections. “But if there is significant slippage between now and then, they will be forced to pull the trigger,” Muscat said.
Dykes said what was required to boost growth was an environment that improved business confidence and investment, most importantly by creating policy certainty. “That
is really where the lever of growth is.”
The successes of the state’s renewable energy procurement programme, which fast-tracked private sector participation, should be replicated in other sectors such as transport, he said. It would reduce the burden on the state and result in fewer financial, skills and implementation constraints.
South Africa is also facing global economic headwinds. Growth in China, a major commodity consumer, is cooling amid an intensifying trade war with the United States. At the same time, central banks in the US and Europe are slowly beginning to increase interest rates and unwind years of quantitative easing, reducing the risk appetite for emerging markets.