Gigaba has no rabbit to pull out of his hat
Going into next week’s medium-term budget, the one thing that is crystal-clear is that it is impossible for Finance Minister Malusi Gigaba to deliver on his promise that he will stick to the path of fiscal consolidation outlined in the previous budget.
What, if anything, he plans to do about it is the big question economists and ratings agencies are asking. And a presentation last week by S&P Global’s lead sovereign analyst for SA, Gardner Rusike, highlighted the fiscal concerns that could prompt further downgrades, if not now then in 2018, after the ANC elective conference and the February budget.
Gigaba’s first budget has attracted a lot of attention; many economists have already released their previews, with varying estimates of just how far revenues will fall short of budget targets.
Citi economist Gina Schoeman’s R33bn is one of the lowest, with others pegging it well above R40bn. Most now expect a deficit of more than 4%, not the 3.5% projected in February.
Rusike flagged slower-than-expected economic growth and its effect on tax revenues as one of the agency’s concerns. He, too, seems to expect the deficit will go over 4% and the public debt will keep rising.
The argument from the Treasury and some economists is often that little can be done “in-year” to keep the deficit from blowing out if revenues severely underperform: the government can’t raise taxes until 2018 and there are limits to how much can be done in the current fiscal year to cut spending, so all the minister can do is try to get back on the path of fiscal virtue for the next two years of the medium-term framework.
However, S&P clearly isn’t buying that argument. Rusike says he hopes for “some adjustments” to counter the shortfall, not just in 2018 but in 2017, as he believes there is scope for efficiencies within existing spending.
For S&P and the other ratings agencies, the second and even bigger concern is the issue of government support for state-owned enterprises (SOEs).
Increasingly over the past couple of years, the agencies have expressed concern about the government guarantees to financially ailing SOEs and the risk that those guarantees might actually be called — particularly by South African Airways (SAA), but even by Eskom, whose R350bn in guarantee facilities is by far the largest chunk of the total of R478bn in guarantees the government has in place.
S&P upped its estimates of the fiscal risks posed by the guarantees from “limited” to “moderate” at the end of 2016.
Now the risks have indeed begun to materialise and that brings a whole new set of concerns about the government’s willingness to stick to its promises. Three years ago, the then finance minister undertook that any bailing out or recapitalising of SOEs would be done in a deficit-neutral way. In other words, the money would not be the taxpayers’ money in the National Revenue Fund but would come from other sources — which is why the government sold its Vodacom shares to inject cash into Eskom a couple of years ago.
This time, however, Gigaba has raided the public purse for the R5.2bn needed to bail out SAA and prevent it defaulting when Standard Chartered and Citibank refused to roll over their loans to the airline. He needs a total of R13bn for SAA, and though that had been expected to come from a sale of the government’s stake in Telkom, that seems to be off the table — at least for now.
If there is some other deficit-neutral way of funding the bail-out, no one can guess what it might be. And the outcome is even more questionable after Tuesday’s news that Parliament has obtained a legal opinion saying Gigaba was not within his rights to draw the cash from the National Revenue Fund.
Meanwhile, S&P is understandably concerned that the government is again shifting the fiscal goal posts. Asked whether he was concerned about the state moving equity from high-performing entities such as Telkom to nonperformers such as SAA, Rusike said that did not affect the way S&P viewed the rating “… as long as SA stays the course on fiscal consolidation and that the support [to SOEs] does not weaken the fiscal position of government — but if it does, it will impact on the rating”.
For all the agencies, the political risk is elevated ahead of December’s elective conference. But the perception seems to be that this is a transition period and things could settle down in 2018.
If economic growth picks up, it could take the pressure off Gigaba (or whoever is the finance minister by then). But perhaps only die-hard optimists will believe that December will yield such a benign outcome.
AS LONG AS SA STAYS THE COURSE ON FISCAL CONSOLIDATION AND THE SUPPORT DOES NOT WEAKEN THE FISCAL POSITION Gardner Rusike S&P lead sovereign analyst for SA