Fees spree sure to dump SA on junk heap

Business Day - - FRONT PAGE - HILARY JOFFE

Tucked away in the back of Oc­to­ber’s medium-term bud­get pol­icy re­view, in the risk sec­tion of the doc­u­ment, are a few lines on pol­icy pro­pos­als that are “cur­rently not funded”.

Most press­ing of these, the doc­u­ment po­litely says, is higher ed­u­ca­tion, where the gov­ern­ment is con­sid­er­ing op­tions to in­crease af­ford­abil­ity for stu­dents — op­tions that could cost be­tween R17.7bn and R40.7bn in 2018-19.

Turns out it’s the R40.7bn Pres­i­dent Ja­cob Zuma is try­ing to force through, hi­jack­ing the bud­get process to de­liver a feefree plan de­vised on the ad­vice of a fam­ily friend who turns out to have been a spy — and against the ad­vice of the He­her com­mis­sion on higher ed­u­ca­tion as well as the Davis tax com­mit­tee.

It’s a num­ber al­most as large as the en­tire R52bn an­nual bud­get for the Depart­ment of Higher Ed­u­ca­tion — and large enough that if the Trea­sury were to cut spend­ing and/or hike taxes by that amount, the gov­ern­ment could get back on the path of fis­cal con­sol­i­da­tion it so spec­tac­u­larly fell off in the medium-term bud­get.

Con­firm­ing this week that Trea­sury bud­get of­fice head Michael Sachs had left, Fi­nance Min­is­ter Malusi Gi­gaba as­sured the na­tion that the Trea­sury re­mained com­mit­ted to a bud­get that fo­cused on fis­cal con­sol­i­da­tion and was mind­ful of SA’s eco­nomic chal­lenges. The events of the past week, how­ever, sug­gest it may be too late for that.

One rea­son is that there may be no go­ing back from the dam­age done to the cred­i­bil­ity of fis­cal pol­icy and to the Trea­sury as an in­sti­tu­tion; an­other is that the dam­age done to the fis­cal num­bers may prove much be­yond R40bn.

The new demo­cratic gov­ern­ment spent years turn­ing around the bank­rupt pub­lic purse it in­her­ited from apartheid and build­ing a trans­par­ent, pre­dictable, dis­ci­plined ap­proach to fis­cal pol­icy, which yielded huge so­cial and eco­nomic div­i­dends.

In the past four years or so, the cred­i­bil­ity of SA’s fis­cal pol­icy and of the Trea­sury as an in­sti­tu­tion have helped SA to cling on to at least the more im­por­tant of its in­vest­ment grade rat­ings, even though its fail­ing eco­nomic growth, de­te­ri­o­rat­ing fis­cal met­rics and frac­tious pol­i­tics would oth­er­wise have al­ready seen it down­graded some time ago.

How­ever, Gi­gaba’s bud­get put a deep dent in that cred­i­bil­ity not only be­cause the num­bers were so bad but be­cause he seemed not to have the po­lit­i­cal sway even to prom­ise to fix them. The dis­clo­sures of Zuma’s bud­get coup would seem to have con­firmed that.

And there’s no go­ing back from the de­par­ture of Sachs, a highly re­garded pro­fes­sional with im­pec­ca­ble ANC cre­den­tials who had led the bud­get of­fice through an ever more chal­leng­ing decade. If Sachs has had enough, the rat­ings agen­cies will surely have had enough too. A down­grade to junk sta­tus all round was al­ready on the cards fol­low­ing the medium-term bud­get; it is all but in­evitable now when Moody’s In­vestors Ser­vice and S&P Global up­date their rat­ings next week.

The dis­turb­ing ques­tion is whether this might be but the first of many down­grades, given what could hap­pen to the num­bers. The bud­get cuts the Trea­sury has re­port­edly been in­structed to find to ac­com­mo­date the pres­i­dent’s R40bn will leave no space for other spend­ing cuts, so any chance of con­sol­i­da­tion will be blown out of the wa­ter.

In ad­di­tion, there is the pub­lic sec­tor wage round com­ing up, and it’s hard to imag­ine the gov­ern­ment tak­ing on the pub­lic sec­tor unions at this crit­i­cal junc­ture. Yet the Trea­sury has warned that pay hikes of even a sin­gle per­cent­age point above in­fla­tion will add bil­lions to spend­ing over the next three years. Then there’s the in­ter­est cost on the pub­lic debt, which is al­ready the fastest ris­ing item on the bud­get.

Oc­to­ber’s bud­get and the news of Zuma’s fee plans and Sachs’s res­ig­na­tion have led to bond yields spik­ing by about 60 ba­sis points to al­most 9.5% — head­ing to­wards the 9.8% at which yields peaked af­ter Nenegate. That adds at least R1.7bn to the in­ter­est cost on the new bor­row­ing the gov­ern­ment needs to do in 2018 — and that’s even be­fore a down­grade. Whether the down­grade to junk is priced into mar­kets is a big ques­tion.

A sec­ond, re­lated ques­tion is the ef­fect of a down­grade on growth in 2017 and into the next three years of the bud­get frame­work. Even based on the Trea­sury’s mid­dle-of-the-road sce­nario, growth in 2018 could be much lower than its 1% fore­cast — its worst-case sce­nario is a deep re­ces­sion.

Lower growth means an even big­ger rev­enue short­fall than Gi­gaba has pen­cilled in in his three-year frame­work. Even in 2017, growth could fall short of his mod­est 0.6% fore­cast and the rev­enue short­fall could be higher than R50bn – num­bers of up to R80bn are be­ing whis­pered. All of which sug­gests that Fe­bru­ary’s bud­get could look even more dire than Oc­to­ber’s, de­spite the new pres­i­den­tial fis­cal com­mit­tee that is sup­pos­edly go­ing to sort it out.

Whether the out­come of the ANC’s De­cem­ber elec­tive con­fer­ence will make the out­look worse or bet­ter is what every­one is watch­ing for. But once dam­aged, in­sti­tu­tions and cred­i­bil­ity take much time and po­lit­i­cal will to re­pair. That will be the chal­lenge for who­ever wins in De­cem­ber.

THE QUES­TION IS WHETHER THIS MIGHT BE BUT THE FIRST OF MANY DOWN­GRADES, GIVEN WHAT COULD HAP­PEN TO THE NUM­BERS

Joffe is edi­tor at large.

HILARY JOFFE

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