Stand by for judgment
And now it’s over to Moody’s Investors Service to pass its judgment. Finance minister Tito Mboweni’s mediumterm budget policy statement was bad. None of it will have come as a surprise as the market has had time to digest updated numbers from everyone from the SA Reserve Bank to the ratings companies since the Treasury released the main budget in February.
First-quarter GDP numbers, which saw the economy contracting by the most in a decade, were the first real indication that most of the government’s forecasts on growth and debt metrics would prove to be unrealistic. It was, therefore, almost a given that looking further out, the numbers would be much worse than was indicated earlier in 2019.
Very few people would have, for example, expected the government’s prior forecast that the debt-to-GDP ratio would peak at just more than 60% in 2023/2024 would be realised. But it still came as shock to discover that it would shoot up to 71.3% a year earlier than that. And that may not even be the peak, thanks to Eskom, which might require even more than the R230bn set aside for the next decade. Depending on what happens with Eskom, that number could shoot up to almost 81% by 2027/2028.
For context, when Trevor Manuel delivered his last budget in 2009, the ratio was just 23%. To think that then he was able to congratulate himself for having managed to see it through politically difficult decisions that had brought it down from 48% in 1996. As the country faced the depths of the global financial crisis, he was able to say he had got the fiscus into such a healthy state that “today we are able to respond to the economic downturn, boldly and decisively. We are able to announce a countercyclical fiscal stimulus, on the strength of a secure and sustainable fiscal position”. It was a double misfortune that the country got the global financial crisis and Jacob Zuma almost at the same time. While our peers saw a recovery in their economic performance and debt position over the next decade, SA remained a laggard. And we have never got our house in order.
That has to change. We have no time to lose and we can only hope Mboweni’s comrades in the ANC, Cosatu and SACP will heed his call for serious discussions on how to resolve what is a national crisis, though the initial reaction from the trade union federation wasn’t promising.
Unfortunately, Mboweni’s call for everyone to deal with the key questions, without ideological grandstanding, will probably fall on deaf ears. While the spending cuts planned for 2021/2022 are less than the extra spending set aside for Eskom that year, this doesn’t mean we will be spared talk about this being an austerity budget. There are people who still believe the government can just keep on borrowing as if there’s no tomorrow.
The country’s bonds and rand predictably declined, though one can argue that the moves could have been even more brutal considering the nature of the news on offer. Perhaps there is a possibility that traders don’t quite believe all is lost.
The rand dropped about 2% as Mboweni was speaking, eventually breaking above the R15/$ level. At 6.38pm on Wednesday, it was down 2.51% to R14.988/$. Bonds were also down, with yields on 2026 bonds rising about 23 basis points.
The immediate move isn’t always the best indicator of the medium- and long-term sentiment, and we’ll have to wait and see where the markets settle in the lead-up to Moody’s announcement on Friday and the aftermath.
Mboweni seemed sanguine about the ratings companies, saying they understand the difficulties the country finds itself and the “actions we are taking”.
On the last score, he might be overly optimistic. While the realism is welcome and the Treasury should be congratulated for not trying to sugarcoat the numbers, it is unfortunately inadequate as far as charting a way forward is concerned.
THERE ARE PEOPLE WHO STILL BELIEVE IT CAN JUST KEEP ON BORROWING AS IF THERE’S NO TOMORROW