Special budget must match promise with execution
Finance minister Tito Mboweni’s bleak supplementary budget centred on the yawning gap, or as he put it, the “hippopotamus mouth” between where SA’s debt is headed if we do nothing, and where it needs to be, to avoid bankruptcy.
But an equally important “hippopotamus mouth” that government must close is the gap between the “fiscal reckoning” laid out in the supplementary budget, and what spending cuts and structural reforms the state actually executes.
The bitterly sobering picture presented by Mboweni and his Treasury team, outlined in stark relief the debt-stabilisation battle that lies ahead.
Its success, however, is predicated on overhauling the state’s approach to budgeting, aggressive spending cuts on top of already steep reductions in public servant wages, and action on long-promised economic reforms to “pivot” SA’s Covid-19 stricken economy towards recovery.
None of these is easy or assured, say economists, and the lack of detail on the reforms — to be outlined in the medium-term budget policy statement in October — has raised eyebrows.
Already some economists have warned that the dire changes in the country’s financial position — with a budget deficit at 15.7% of GDP and debt levels set to rise to 81.8% this year — could precipitate reviews by credit ratings agencies.
“The significant ramp up in projected debt will likely add to pressure for further sovereign rating downgrades,” said Sanisha Packirisamy, economist at Momentum Investments
“S&P Global in particular could lower their stable outlook on the local currency rating to negative.” In the midst of the stage 5 lockdown, all three ratings agencies — S&P, Moody’s Investors Services and Fitch Ratings — moved to downgrade from the country,’ Moody s. with SA losing its last investment grade ratings
Fitch and Moody’s have SA on a negative outlook, and S&P’s outlook is stable.
For all the agencies, the need for reforms and the government’s failure to deliver them — be it the overhaul of stateowned companies or a lower wage bill — has consistently been an issue of concern.
A slide into deeper junk terrain will have further implications for debt servicing costs, which already swallow up 21c in every rand paid in tax.
The ambitious drive to cut spending by R230bn in the next two years, comes on top of the R160bn in public-sector wages savings announced in February — already a pitched battleground with public-sector unions.
To find these savings, the state is going to test zero-based budgeting, intended to align government’s spending directly with its revenue, rather than using the previous year as a base.
Though Mboweni was adamant that the government had the technocratic expertise to manage that, Packirisamy said it could be a costly process that required more staff and expertise to carry out the “line-item by line-item” spending assessments. “It is a bit more complicated and complex, and as a result can be more time consuming,” she said.
But there are advantages to zero-based budgeting “if you have the time, the money and the skills to do it”, she said.
It could heighten transparency and accountability in the budgeting process and means each expenditure item is “considered on its own merit”.
The move to zero-based budgeting, and the commitment to spending cuts and debt stabilisation “is commendable, but there is a lot of implementation risk”, said Johann Els, Old Mutual chief economist.
“The move to zero-based budgeting is fantastic, but we are all aware of the limited capability of the state,” he said
Nevertheless, Mboweni’s team and President Cyril Ramaphosa’s administration should be given the benefit of the doubt, he said
The promised reforms were, however, critical to achieving the savings needed and raising future revenues.
“The ideals about fiscal consolidation are difficult to achieve without growth,” said Els.
The supplementary budget was described as a “bridge towards the medium-term budget policy statement (MTBPS)” and though policy change has been an ongoing and slow process, within government and the ANC, the document promised “far-reaching reform”, said Els.
“I do get a sense that momentum behind this is building,” he said.
Elna Moolman, the head of SA macroeconomic, fixed income and currency research at Standard Bank SA, said that the combination of the government “finally confronting its fiscal crisis and sending the strongest signal yet that it intends addressing this in a pragmatic manner, and intending using a realistic strategy to achieve this” should give the government more time to “get its fiscal house in order”.
Nevertheless, “the execution risk is high given the magnitude of planned expenditure adjustments”, Moolman said in a note.
The review gave few specifics on reform, but it “emphatically stated that the cabinet had “endorsed” a budget process that moves towards “debt stabilisation”, she said.
That should support continuing purchases of local bonds by local and foreign investors.
But the bar for the MTBPS had been “set quite high”, Moolman said.
“Our expectation remains that investors will, over time, become more cautious about SA’s fiscal risk unless there are decisive steps to improve the fiscal and growth prognoses.”
THE MOVE TO ZEROBASED BUDGETING IS FANTASTIC, BUT WE ARE ALL AWARE OF THE LIMITED CAPABILITY OF THE STATE
OUR EXPECTATION REMAINS THAT INVESTORS WILL, OVER TIME, BECOME MORE CAUTIOUS ABOUT SA’S FISCAL RISK UNLESS ...