Moody's economists see strong rand in medium term (Photo Archive)
Just one word sums up Finance Minister Tito Mboweni’s medium term budget statement: debt.
And if there’s something which was widely expected to be included in the statement, a financial fix for the biggest single risk the country faces, Eskom, it’s not there.
Rather, Mboweni, kicked for touch again, the medium-term budget policy statement (MTBPS) saying that a sustainable plan for state-owned companies is required which should include the disposal of non-core assets and options for private sector participation.
“These measures require difficult decisions that will affect the economy and the distribution of public resources.” These measures will be announced in the 2020 budget, Mboweni said.
The debt-to-GDP ratio is now forecast to balloon to 71.3% over the three-year MTBPS period. An indication of how rapidly the country’s public finances are deteriorating is shown that the 2019 budget projected this to be 59.7%.
Expressed in numbers rather than percentages, this is how Mboweni put it: “This year the national debt exceeded R3-trillion. It is expected to rise to R4.5-trillion in the next three years.
“Clearly, we need to do things differently… this is a serious position to be in.”
Growth, as projected in the budget this February, was put at 1.5%. It is now revised down by a whole percentage point to 0.5%.
Weaker growth is playing havoc on the public purse. “We now expect to collect R1.37-trillion this year. This is R53-billion, or 4%, less than we expected,” Mboweni told Parliament.
As things stand, treasury is revising down its tax revenue predictions for 2020/21 and 2021/22 by R84-billion and R114-billion respectively.
South Africa’s debt-to-GDP ratio has increased by 30% over the past ten years, nearly three times the average of peer countries. Only Argentina, Croatia, Ukraine and Zambia have worse figures.
Ballooning debt, the MTBPS says, means that by “by 2022/3 debt service costs are expected to exceed spending in areas such as health and economic development”.
The MTBPS acknowledges that “significant tax increases over the past several years leave only moderate scope to boost tax revenues at this time. Given the size of the required adjustment, however, additional tax measures are under consideration.”
Mboweni aims to achieve a primary balance — revenue equal to non-interest expenditure — of the main budget within the present three-year cycle. This will be through spending reductions of about R20-billion a year in goods, services and transfers, as well as limiting non-interest expenditure in line with inflation.
“That said,” Mboweni told parliamentarians, “we will need to find additional measures in excess of R150-billion over the next three years, or about R50-billion a year.
“We will need to deal with the challenges of the wage bill, state-owned companies, executive remuneration and benefits and fiscal leakages.”
He said the average wage bill increase across government was 6.8% in 2018/19, or 2.2% above inflation. After adjusting for inflation, the average government wage has risen by 66% in the last ten years.”
A review accompanying the MTBPS shows 29 000 public servants, plus members of the national executive, MPs and members of the provincial executive who all earned more than R1-million last year. “After adjusting for inflation, this is more than double the number of civil servants earning more than R1-million in 2006/7.”
We are all in this together, the state-owned companies, public entities and private sector, the finance minister said, the message being that board and executive management compensation and benefits should be reduced.
Mboweni said President Cyril Ramaphosa had agreed to guidelines that for the foreseeable future cabinet, premiers and MEC salaries will be frozen at current levels, with the likelihood of an adjustment downwards; the costs of official cars will be capped at R700 000; a new cell phone will cap the amount claimable; all domestic travel will in economy class; and there will be no longer payment for subsistence and travel for both domestic and foreign trips.
“I encourage the leadership in parliament to think about how they can further contain their compensation and benefits,” he said.
But is clear that work, in the form of negotiations with public sector unions, still has to be done on this front.
Mboweni sees growth coming from reforms mooted in his economic transformation document released earlier in the year, an updated version of which was due to be made public during his speech to Parliament.
The mooted reforms include lowering barriers to entry, diversifying power generation by granting licenses for small-scale generation, expanding telecommunication services by allowing the rapid expansion of fibre infrastructure and prioritising job-creating sectors such as agriculture and tourism.
“We can do some of these things quickly. Already, the new integrated resources plan charts a greener course forward on energy. We can accelerate spectrum licensing and a move towards 5G. We can make it easier to do business.”
While some kind of big fix for Eskom was widely expected, Mboweni said little in this respect. He said “we must wean state-owned enterprises off the national budget. They must learn to stand on their own feet.”
He said the government cannot continue to throw money at Eskom. For the sizeable support it requires (R230-billion over ten years), it cannot be business as usual. Eskom must run its current plant and equipment better, must achieve operational efficiencies, including better cash management and fast track the separation of the utility into three parts as endorsed by its political principals.
Treasury’s stick it will now use is that cash flow support will no longer be as equity [a bailout] but in the form of loans.
“Once I am convinced that the Eskom board and management has made an irrevocable commitment to implement government’s decisions and there is enough progress, we will negotiate the appropriate size of debt relief.
“Eskom is a business and should be run that way.”
This remains to be seen. When Eskom has previously run out of funds and threatened to self-implode, taking the country down, treasury has come up with the necessary life support.
But equally, if there is a plan to sell part or Eskom or refinance it in some constructive way this is only possible when the new investors, private or public, have enough confidence that they are not throwing good money after bad. As the rest of the country is doing at present.