/ 21 March 2020

Mboweni’s tricky juggling act

Tito Mbowen
In 2020, former finance minister Tito Mboweni Tito Mboweni announced his plan to reduce the public sector wage bill in an effort to squeeze some of the air out of the country’s ballooning debt and fiscal deficit. (Delwyn Verasamy/M&G)

South Africa is not unique in facing a situation where Covid-19 could hit the economy hard. But it has few tools to deal with the economic effects of the disease, largely because massive government spending in the decade since 2009 has not resulted in the kind of infrastructure that, in turn, boosts the economy.

Where other countries have had record economic growth in the past few years, South Africa is in the middle of a technical recession. This is before Covid-19 started to hit.

Finance Minister Tito Mboweni is faced with having to find a way to stimulate an already weak economy, pay for the health cost of Covid-19 and then mitigate the effect of that disease on the economy and workers.

“South Africa, unlike many other countries, is in a very precarious fiscal situation,” said Michael Sachs, an adjunct professor at the University of the Witwatersrand.

Although there is a growing case for a stimulus package, it had to be done in the right way. “We should do whatever it takes to respond to the virus, but, on the other hand, over time, unless we have economic growth returning, it will add to our vulnerability and those things have to be considered as well,” he said.

Sachs was referring to South Africa’s debt to gross domestic product ratio, which is nearing 70%, and the country’s previous bad spending habits.

He said if the government acts, but does not execute their response properly, it can add to the crisis rather than boosting growth. Investors would lose confidence in the government, because its stimulus would be seen as poorly planned and executed. This would result in a flight of capital out of the country — exacerbating the current shock on the economy.

Sachs said that while fiscal stimulus is a good thing, the problem with doing it in response to Covid-19 is it has to be in a timely, temporary and targeted manner. If money is released, it has to go to the right people and be spent accordingly — and it must be a temporary measure.

Speaking this week at a media briefing in Pretoria alongside other heads of government about their plans to mitigate the effects of the Covid-19, Mboweni said his department’s main objective during this time of battling a global pandemic is to ensure that the economy does not continue to slow down.

“Our primary objective at this moment is that the economy does not grind to a halt, it must continue to operate. Because if the economy grinds to a halt, it means we get less tax revenue, [which would] mean that we are unable to finance all these activities that we want to finance.”

He added that people should not panic, but rather act in a way that ensures the economy gets moving.

As it stands, markets in South Africa have been gyrating as investors dropped equities in favour of bonds and gold. The country’s bond yield (the interest rate that South Africa pays on the debt) has been increasing. The 10-year bond yield increased to 11.44% on Wednesday as investors started moving out of emerging markets in favour of United States bonds. The rand is not doing well either. On Wednesday it breached R17 to the dollar. It now costs the government more to borrow money for, say, something like a bailout or a stimulus package.

This movement in stock is not unique. Markets are scrambling everywhere.

Various countries have provided packages to stimulate their economies (Timothy Clary/AFP/Getty Images)

The New York Times reported on March 17 that the virus is affecting how capitalist economies work. The basis of those economies, put simply, is the relationship between one person’s spending and another’s income. The newspaper said: “What is so deeply worrying about the potential economic ripple effects of the virus is that it requires this perpetual motion machine to come to a near-complete stop across large chunks of the economy, for an indeterminate period of time.”

As production and consumption have slowed, countries have opted to use both monetary and fiscal policy as tools to react to the downturns in markets by pouring money into financial institutions and lowering interest rates.

The US is planning to even go further. This week, The Washington Post said the government wants to give direct cash payments to Americans in the coming weeks to help them cope with the economic effects of the coronavirus. The newspaper reported that the disbursements would happen in two stages, on April 6 and May 18, each worth $250-billion, with the precise amount varying depending on income and family size.

On Monday, Mboweni said before a stimulus package could be considered, work must first be done to get the economy moving forward. “Let’s make sure that we do not get into a prolonged recession,” he said.

South Africa has already gone through two quarters of economic contraction. The finance minister didn’t say how the country will be kept out of a recession, but said he is talking to the South African Reserve Bank, other banks and people who manage the JSE.

For now, money to tackle the Covid-19 health crisis will come from the national disaster fund. He would not say how much is in that fund, but the Mail & Guardian spoke to an economist who put it at close to R5-billion.

Money would also be taken from other departments. “As the situation develops, we will need to further finance. That means we need to reduce programmes throughout the government system by reducing the allocated amount so that we can shift funds to this programme,” Mboweni said.

This comes after his February budget which emphasised that government should reduce spending.

Duma Gqubule, an independent economist, said the central bank is the first port of call when trying to stimulate the country’s economy. 

He said the 20 or more countries that have reacted to the Covid-19 outbreak using monetary policy have provided direct support to the economy.

Nigeria, for example, cut interest by 400 basis points and offered to support micro enterprises and healthcare organisations.

Gqubule said the South African Reserve Bank can recapitalise some of the development finance institutions such as the Development Bank of Southern Africa so that money could be loaned to small businesses.

He also said the 2020 budget should be reconsidered and restructured to create a once-off stimulus package.

Another suggestion was that money could come from the Public Investment Corporation, which had about R2.083-trillion in 2018, and the Unemployment Insurance Fund, which has about R180-billion. Gqubule said surplus money from these institutions could be used to finance a stimulus package. The funds, in turn, will get money back because people would have jobs and thus be able to pay into their pensions and insurance. If the economy stalls, then those payments also stop, he warned.

Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian