Long journey to fiscal health but not an unfamiliar one
SA’s national debt has probably reached levels last seen during the tenure of the apartheid government, which propped up an expensive political system that most of the rest of the world despised.
Former president Jacob Zuma’s tenure was not as costly to taxpayers as FW de Klerk’s, but at the end of March debt service costs were projected at R162bn — equivalent to 13% of all tax revenue collected.
When democracy arrived in 1994, the new government inherited a flailing economy. Years of sanctions against the apartheid regime had ravaged the economy and plunged the country into junk status.
Restoring the health of the economy was a mammoth task for the new administration, but during former finance minister Trevor Manuel’s tenure in that position, SA climbed back into investment grade and economic growth soared.
President Cyril Ramaphosa also inherited a poisoned chalice from his predecessor and when he took office there was a mixture of relief and apprehension as the country’s small taxpayer base faced once again paying back the money lost to poor political management and corruption.
There was a sigh of relief at the end of March when Moody’s changed its outlook for the country from negative to stable and maintained investment grade. But ratings agencies S&P Global and Fitch still have SA on subinvestment grade.
Last year was one of the most tumultuous years for the economy since the 1990s, driven by political uncertainty and cabinet reshuffles that shook investor confidence.
The country was, however, unable to take advantage of a largely favourable global economic environment.
Mercantile Bank consulting economist Trudi Makhaya says 2017 “was characterised by policy uncertainty, most visibly with regard to fiscal policy, where leadership changes raised questions about the direction of SA’s finances”.
While the economy has struggled to recover from the fallout from the 2008-09 financial crisis, policy uncertainty and concerns about the integrity of institutions led to the loss of SA’s investment grade status for debt denominated in foreign currency at S&P and Fitch and the loss of its investment grade status for local currency debt at both agencies over the course of 2017, says Makhaya.
“This reverses the efforts of previous post-apartheid administrations that worked to earn the country investment grade status by June 2000.”
SA’s national debt is estimated to reach levels last seen after 1994 in the fractured economy that the Mandela administration inherited.
The debt-to-GDP ratio was 48% under former finance minister Chris Liebenberg’s tenure in 1995. Under Manuel, the ratio dropped markedly to 27.8% in 2008 and 2009, just as the global financial crisis hit.
In 2017 the Treasury estimated the debt-to-GDP ratio reached 53.1%.
“SA has made its way up the credit rating path before to A grade, even an A+, and it can make it back again,” says Investec chief economist Annabel Bishop.
“This previous upwards credit rating trajectory occurred in the 2000s and was driven by strong economic growth, fiscal consolidation and good governance of both stateowned entities and general government,” she says.
In the early 2000s, the government focused on upgrading infrastructure while following fiscal consolidation. Through improved fiscal management, money became available for spending on infrastructure, which supported private corporate sector expansion, says Bishop.
Fixed investment growth accelerated to double digits over this period, propelling economic growth to above 5% and unemployment to below 22% while credit ratings rose, with an A+ from Moody’s.
Bishop says the expansion of fixed investment in the 2000s, with help from the private sector, created greater demand for goods and services. Along with free market policies, this entrenched the protection of private sector property rights and strong institutions. What resulted was a boost in business confidence that spurred economic growth.
Economic policy at the time focused on tapping into the ability of the economy to produce, ensuring sufficient infrastructure was in place to support faster growth.
With the increased global demand for South African exports as commodity prices lifted and global economic growth accelerated, the country was well poised to expand the productive capacity of the economy, says Bishop. “This all ended in 2009.”
In 2017, economic growth was at an improved but still paltry 1.3% while unemployment remained exceedingly high at 27.7%. Business confidence was at its lowest level since the global financial crisis but has started to pick up with the palpable sense of Ramaphoria.
Absa senior economist Peter Worthington says business and consumer confidence are the core of rebuilding the economy.
“There’s a sense that the country is moving forward. Growth is high and business is investing. If you make people believe in the government, the players will line up,” he says.
SA has made strides in the past couple of months, including the election of Ramaphosa, a renewed commitment to fiscal consolidation, a cabinet reshuffle that saw the return of Finance Minister Nhlanhla Nene and the suspension of South African Revenue Service commissioner Tom Moyane.
Economic growth also accelerated for the first time in four years in 2017.
But the country still has many challenges to navigate in order to manage investor sentiment, says Boston Consulting Group SA managing partner Adam Ikdal.
Of the utmost concern is tackling the issues of stateowned enterprises and greater policy certainty.
The task now set out by Moody’s is to halt the deterioration in the institutional framework, restore management at parastatals, achieve higher growth through improved confidence, and fiscal adjustment plans to stabilise and reduce debt through material cuts in expenditure
It’s a seemingly insurmountable task but it’s reminiscent of the apartheid hangover, which makes it seem possible again.