(John McCann/M&G)
NEWS ANALYSIS
Finance Minister Tito Mboweni — 50 minutes late, it has to be said — began his briefing to journalists who were in the lock-up ahead of his medium term budget statement to Parliament with a primer explaining that this was not a mini-budget and that perhaps it was time to reconsider the role of this half-way update on the state of government’s finances.
He said that the medium-term update had been begun by then finance minister Trevor Manuel in 1997 as an indicative statement trying to chart the way forward “in good times and bad times”.
Perhaps, though, it was time to evaluate the efficacy of this approach, he said, adding that a thorough review of the successes and failures of the medium-term budget policy statement, as it is known, had not been conducted.
If he had issues with the statement, it was not exactly clear what they are, but it appeared as if he sees it as an indicative pathway of “what we need to do”.
Journalists in the lock-up hand in their cellphones and sign a secrecy agreement in exchange for an early copy of the speech, a 20-page handout of the key points and graphs, as well as the fat, 364-page AENE (adjusted estimates of national expenditure).
You didn’t have to read far in to pick up some real shockers. Government debt is projected to rise within three years from the present R3-trillion to R4.5-trillion. The debt to gross domestic product (GDP)ratio is now forecast to balloon to 71.3% over the three-year medium-term budget policy statement period. An indication of how rapidly the country’s public finances are deteriorating is evident in that the 2019 budget, tabled in February, projected this ratio to be 59.7%.
In February growth for the year was estimated at 1.5%; it has now been revised down to just 0.5%.
Weaker growth is playing havoc with 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, the 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 30% over the past 10 years, nearly three times the average of peer countries. Only Argentina, Croatia, Ukraine and Zambia have worse figures.
Ballooning debt, the medium-term budget policy statement says, means that “by 2022-23 debt service costs are expected to exceed spending in areas such as health and economic development”.
The markets responded as you’d expect, the rand down 30 cents to the dollar, breaking R15; bond yields rising 35 basis points; and bank shares falling 2%. This is not the kind of budget you’d want to put out just before an expected rating by the last agency that has you at investment grade. Those analysts who were prepared to stick their necks out and make a prediction suggested either a downgrade or a negative outlook with an actual downgrade next year.
Mboweni warned that unless the debt position was fixed the country could end up in a debt trap — where you borrow to service debt. “This is a very serious matter.” You could end up in the hands of the International Monetary Fund in no time if this happens, he explained.
The key challenges facing the fiscus are state enterprises, particularly Eskom, as well as public sector wages. Some kind of intervention was widely expected to be announced to triage the haemorrhage that is Eskom, including possibly accessing green climate funds at preferential rates in exchange for agreeing to prescribed periods to phase out its coal-fired power stations, auctioning off its power stations, transferring its debt to the government’s balance sheet and, perhaps, persuading big bond holders, such as the Public Investment Corporation, to exchange debt for equity.
But if some kind of big fix was expected, it was not there. All the medium-term budget policy statement says is that a sustainable plan for state-owned companies is required that 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,” said Mboweni, adding that such measures would be announced in the 2020 budget.
“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 10 years), it cannot be business as usual, the medium-term budget policy statement says. 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.
The treasury intends taking a stick to Eskom: cash-flow support will no longer be made available as equity (a bailout) but rather 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,” the finance minister said. “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, the treasury came up with the necessary life support. And we know that the business model of most of our state-owned entities is to manage themselves in a state of financial distress. It matters little to them if support comes as an equity injection or a loan — as long as they get the money.
In Eskom’s case, it knows it will get the money because without electricity there is no economy.
But equally — and this is evident in the special report released by Public Enterprises Minister Pravin Gordhan — the day before the medium-term budget policy statement, if there is a plan to sell part of Eskom or refinance it in some constructive way, this will be possible only when the new investors, private or public, have enough confidence that they are not throwing good money after bad.
Gordhan’s report essentially looks to fix Eskom by running it properly, bringing down costs and opening the way for a competitive energy market in which the new transmission entity will be able to source power from the lowest-cost supplier to replace the monopolistic dead hand that has landed us in the unhappy place we are at present.
Another major challenge for Mboweni is the public sector wage bill. He said the average wage increase across government was 6.8% in 2018-19, or 2.2% above inflation. After adjusting for inflation, the average government wage has risen 66% in the past 10 years.
A review accompanying the medium-term budget policy statement shows that 29 000 public servants — as well as members of the national executive, MPs and members of the provincial executive — 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 2006-2007.”
Mboweni said the president had agreed to guidelines that, for the foreseeable future, salaries for Cabinet minsters, premiers and MECs 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 cellphone policy will cap the amount claimable; all domestic travel will be economy class; and there will no longer be payment for subsistence and travel for both domestic and foreign trips.
But it is clear that work, in the form of negotiations with public sector unions, still has to be done on this front. “We look forward to robust discussions in the relevant bargaining structures and with other stakeholders to achieve a sustainable arrangement,” Mboweni said.
So rather than see the medium-term budget policy statement as a statement of where we are, Mboweni suggests we should see it as what we need to do. This weaponises it: we cannot continue to borrow without consequences. Hard choices have to be made, and soon.