Miserable growth outlook weighs on fiscal metrics

Finance minister Tito Mboweni painted a bleak picture of economic growth, which the Treasury expects to slow further in the coming years, eroding the state’s ability to get a handle on its finances.

The worsening growth outcome, alongside deeper revenue shortfalls and draining support for state-owned entities (SOEs), is one of the main reasons that the government’s debt trajectory does not stabilise in the coming years, despite Mboweni announcing spending cuts of R261bn, which include a cut of R160bn in the state’s wage bill.

To jump-start growth and halt the unchecked deterioration in government finances, Mboweni stressed the need to implement economic reforms, a number of which are outlined in the Treasury’s economic strategy paper.

They have to begin with reforms on the energy front to improve electricity supply and address the burden that power utility Eskom has become on growth, Mboweni said.

Steps include efforts to expand private sector power generation, as well as reforms in other network industries such as ports and rail, where inefficiencies have increased the cost of doing business in SA.

“At the end of the day, we have to have a growth story,” Mboweni told journalists in a press briefing ahead of his speech.

The Treasury now expects economic growth to have reached just 0.3% in 2019, down from the already revised figure in October’s medium-term budget policy statement estimate of 0.5%.

Its forecast for the current year has also been revised sharply down to 0.9%, from the 1.2% forecast in October. It now expects growth to reach 1.3% in 2021 and 1.6% in 2022, down from October’s estimates of 1.6% and 1.7%, respectively.

These are lower than the SA Reserve Bank’s prediction, which expects the economy to grow at 0.4% in 2019, 1.2% in 2020 and 1.6% in 2021.

“Growth is much lower, the economy is much smaller and revenue shortfalls are substantial again,” said Ian Stuart, acting head of the budget office, noting that this is contributing to the difficulty the state has in reducing its debt trajectory.

Weak growth resulted in SA’s unemployment level reaching a record high of 29.1% during 2019. At this level, growth will average 1.3% over the next three years — well below the average of 1.8% between 2010 and 2018, and below the current population growth rate of 1.4%. This indicates that SA’s GDP per capita is set to decline, meaning on average individuals will grow poorer over time.

In the Budget Review, the Treasury again highlighted the “large toll” Eskom is taking on economic growth, with the power cuts in the final months of 2019 expected to have shaved off 0.1 of a percentage point. “Without intervention, the impact of supply disruptions on growth will be greater in 2020,” Treasury said.

The Treasury also warned that serious risks to its forecasts remain if there is continued deterioration in the financial condition of state-owned companies that compound the demands on the fiscus, further power supply problems, policy inertia and the slow implementation of structural reforms.

It outlined two scenarios for economic growth. Should SOE finances deteriorate further, raising borrowing costs and reducing confidence and investment amid worsening global growth, SA’s economy could contract during 2020.

However, the Treasury said if the reforms outlined in its economic strategy paper are implemented, this could help raise growth to almost 2% in the coming three years.