President will have more political space if he makes allies and gets money flowing
The last three budget speeches, given by two finance ministers in a year, have delivered sharply different messages. On a graph it would look like a pyramid.
The first point on the pyramid was the medium-term budget statement in October 2017, delivered by Malusi Gigaba. It was shock therapy. Gigaba, it was said, was the fall guy, haplessly announcing that the government was in serious financial trouble.
Debt was set to grow to record levels in the democratic era. The country was swiftly downgraded to junk by two ratings agencies in the wake of Gigaba’s speech. It piled pressure on the Zuma government for its fiscal waywardness.
Gigaba also delivered the budget speech in February and took the country to the peak of the pyramid. It had a tone of optimism. While debt was substantial, there was a sense of being on the front foot, buoyed by the President Cyril Ramaphosa-induced optimism of the first quarter. Debt requirements were revised downwards, reaching a maximum in three years and a promise of improvement after.
But new finance minister Tito Mboweni’s speech last week took SA most of the way back to the impact of Gigaba’s bad news. SA is in trouble, and it is worse than we thought six months ago. Between Gigaba and Mboweni’s speeches, the economic outlook has turned sharply worse, with the country in recession.
Mboweni made it clear that the government has been unable to consolidate expenditure and must now borrow more than previously thought. In the next two years the government will borrow R48.7bn more than it thought it would in February.
The impact is clear to see in the Treasury’s bond yields, an indication of what the government will have to pay to issue all that debt. After Gigaba’s October speech, yields on the benchmark R186 spiked dramatically, reaching 9.47% by mid-November 2017. The election of Ramaphosa as ANC leader marked a recovery, accelerated by Gigaba’s February speech. By the end of March 2018, the yield was at a four-year low of 7.86%.
Things have backtracked since, with yields back up to 9.38%, spiking last Wednesday, after Mboweni’s speech, from 9.15%. The difference between the March low and the present level makes a big impact in the cost of newly issued debt. The R230bn of gross debt that will have to be issued in 2019 will incur R3bn of additional interest, which will have to paid every year.
That is a lot of money that could be spent on service delivery and infrastructure.
So it is crucial that Ramaphosa finds a way to get the country back on the front foot. The recession has severely damaged SA’s ability to attract funding at a time it desperately needs it. He lacks the political space to rein in the cost of the government. The space he has available is to try to turn the private sector into an ally.
Hence last Friday’s investment conference. It was primarily about Ramaphosa using his political space. The pledges made were largely optics. Anglo American’s R71.5bn, for example, which made up more than half the R134bn pledged, was clearly part of its existing capital expenditure plan. It had budgeted capital expenditure of $2.4bn to $2.6bn for 2018.
The pledges won’t move expectations of weak economic growth. But what mattered more than the numbers was the spectacle of Ramaphosa, flanked by economic development minister Ebrahim Patel, sharing a stage with big business heavy hitters. Business people were elated to be given the space. Casting the issue as one of investment has allowed Ramaphosa to use the conference to enhance his political standing as the man who can get the money flowing.
What’s less said is that for the investment flows to be sustainable and to actually make a difference to the economy, Ramaphosa has to make fundamental changes to the policy environment and the government’s financial management, including the costs of the civil service and state-owned enterprises. That uncomfortable subtext will only come to the fore after 2019’s national election.
As Ramaphosa starts forging a genuine compact between business and the government, with labour given a clear oar in the water too, those political actors will increasingly lose traction and relevance.
The Mboweni speech and the investment conference spectacle could not have been further apart in terms of sentiment impact, but both served a clear political purpose.
While Ramaphosa has had six difficult months, Friday gave him a slight shift in trajectory. If he is able to consolidate that shift and use it to strengthen his political power to deliver genuine economic reforms, the next point on the pyramid graph may be a new peak.