SA cannot wait long for ‘Cyril dividend’
People are calling it the “Cyril dividend”, referring to the surge in positive sentiment and investor confidence unlocked by Cyril Ramaphosa’s election victory at the ANC’s conference.
The expectation is that this will spur consumer spending and investment, allowing SA to outperform the measly growth consensus forecast of about 1% in 2018. Many economists are revising up forecasts, with the most bullish now looking for growth to come in at about 2% or more in 2018, assuming the global environment and commodity prices continue to remain supportive.
If GDP growth rebounds above the Treasury’s sober forecast for 1.1% in 2018, 1.5% for 2019 and 1.9% in 2020, the dire debt trajectory outlined in 2017’s medium-term budget will be reined in.
Instead of exploding to an unsustainable 60% of GDP by 2020-2021, there is now a chance the debt trajectory could stabilise and further rating downgrades be averted. But nothing is in the bag yet. First, Ramaphosa has to sustain the reforming momentum he unleashed with the axing of Eskom’s board, or the nascent surge in confidence will start to flag.
To allow President Jacob Zuma to seize back the initiative by delivering the state of the nation address, and allowing the deeply compromised mineral resources minister, Mosebenzi Zwane, to open the Mining Indaba, will deal a psychological blow to a nation on the cusp of change.
Investors will soon begin to question whether the Cyril dividend is going to pay out after all. For Moody’s Investors Service, poised to junk SA’s local currency rating at the end of its review period in February, the numbers delivered in the 2018 budget on February 21 will be all-important.
SA has backed itself into a fiscal crisis after years of unsustainable spending on a bloated and inefficient government in a slowing economy. It was heading for a R50bn revenue shortfall well before Zuma lobbed the grenade of free university tuition into the mix. Even though the free education plan is supposed to be phased in, not even SA’s existing social spending commitments can be met unless growth returns to its historic average of 3% and stays there, according to the Treasury.
A big part of the problem is that for the past decade, government expenditure has been allowed to grow faster than GDP and tax revenue, climbing from 24.6% of GDP in 2007 to 30% today. As a result, SA has reached its fiscal limits. It cannot afford to offer free higher education (let alone free, universal healthcare) without a step-change to a much faster growth rate. But nor can it delay providing access to better health and education indefinitely given the problems of inequality, poverty and unemployment.
The budget must provide a credible plan to improve education and healthcare delivery while creating jobs, reining in debt and tackling the risks (mostly relating to stateowned enterprise debt) that are building in the fiscal system.
It is clear that routine tax hikes and expenditure cuts are not going to be enough to return SA to fiscal sustainability; nor is the mere fact of Ramaphosa’s election. SA’s fiscal metrics are so fragile that only a return to growth will be able to stop their continued deterioration.
To trigger growth Zuma must go and Ramaphosa must announce a new cabinet packed with business-oriented, credible individuals appointed on merit. Then it must go for growth – aligning everything from the tax system to the country’s economic and social policies to the need to create jobs and spur investment.
The longer it takes for the Cyril dividend to deliver, the more confidence will cool and the more intractable the country’s fiscal and economic problems will become. They can be overcome, but it is time to get moving.