Covid jobs: a new lost decade?
Long-promised reforms vital for fiscal credibility
● SA’s employment numbers have clearly bounced back as the economy has reopened. But it could take a decade for SA to regain all the jobs lost as a result of the coronavirus crisis, if it doesn’t do something different to drive higher levels of economic growth.
That’s the word from economists at PwC, who estimate that the economy may have shed a net 1.3-million to 1.4-million jobs last year. This means up to 2-million more people may be looking for jobs this year compared to a year ago, if the almost 600,000 new job seekers who come on to the labour market each year are included.
“It’s not a pretty picture,” said PwC chief economist Lullu Krugel.
This week Stats SA’s jobs data release for the fourth quarter of 2020 will be closely watched to see to what extent the jobs market may have recovered.
PwC’s bearish estimates are in contrast to the startlingly strong jobs recovery shown in a new survey, which found that though 2.8million people lost their jobs in the hard lockdown between February and April, this was largely reversed when 2.1-million people found employment between June and October.
But results from the National Income Dynamics — Coronavirus Rapid Mobile (NIDSCRAM) survey, released this week, show that these were not necessarily the same people — only half of those who lost their jobs in the hard lockdown found employment later in the year. It also found that levels of hunger and deprivation had increased despite the job gains. And it found that the impact on women was much greater than on men.
“Our main finding … is that active employment in October has recovered dramatically
● If other countries can borrow up a storm, why can’t SA?
It’s a question many will be asking as countries such as the US look to pile on yet more borrowing to stimulate their economies out of pandemic-induced recessions, taking their government debt ratios to levels that make even SA’s scariest projections look relatively modest.
It’s a question too that will be at the centre, again, of this week’s budget.
The answer lies in the fact that SA pays very high interest rates on its government debt and has very low or no economic growth. The combination is a toxic one for the public finances.
Globally, the hot debate about debt has shifted to this issue of the relationship between debt costs and economic growth rates — “R-minus-G” as it’s been dubbed.
With even traditionally cautious bodies such as the International Monetary Fund urging countries to keep stimulating their economies through the coronavirus crisis even if that means running up their debt to stratospheric levels, the argument is that it’s not the absolute level of debt that matters. It is how much it costs, and whether economic growth is fast enough to support that cost and prevent the government’s interest bill consuming ever more of the country’s resources.
That’s why mature markets such as those in the US and Europe can borrow up a storm — they are paying zero or negative interest rates on their debt. Many emerging markets don’t have that luxury. SA is certainly one.
But even among emerging markets, some countries can get away with opening the fiscal taps in the riskiest way because they have what Citi emerging markets chief economist David Lubin calls “growth credibility”.
The example he gave, in a webinar this week hosted by the International Institute of Finance (IIF) and Fitch Ratings, was of India’s recent budget. India has a debt-to-GDP ratio of 90% already and tabled a highly expansionary budget with a 7.8% deficit that’s projected to fall to 4.5% over the next five years, which is still well above its 3% target.
It used its central bank to intervene to cap its long bond yields (the interest rates it pays on the longer-term money government borrows) at 6%.
“It’s a developing country using financial repression to accommodate fiscal loosening — and the market loved it,” said Lubin.
The reason for the market enthusiasm is that India (which had been growing at 7% a year) has what SA does not — an economic growth story. Lubin pointed to Brazil, SA and Mexico as the countries that lack that growth credibility — which is why the market is not willing to give them the benefit of the doubt on fiscal deficits and debt.
Globally, the IIF reports, government debt rose last year by $12-trillion (about R176-trillion) to $82-trillion and is set to rise steeply again this year. But most of that is in mature markets: emerging markets account for just $19-trillion of the total, up by about $1.5-trillion last year.
Fitch estimates emerging market interest rates have effectively moved sideways over the past 10-15 years, while in mature markets interest rates are near zero or less.
And while in mature markets the cost of servicing government debt has fallen as a ratio of GDP even though the total amount of debt has risen, the same is not true for many emerging markets with high debt costs — costs which in large part reflect the fact that investors see their debt as more risky, and have less confidence in their ability to meet their interest bills and pay the debt back over the long term.
This is at the heart of SA’s fiscal crisis. Its debt-to-GDP ratio (government debt relative to the size of the economy) had jumped from 26% before the previous financial crisis to 63% before the Covid crisis, and on the government’s October budget projections is set to climb to 95% within the next three years, even with unprecedented cuts to government spending, particularly on the public sector wage bill.
It could well go over 100%. And even though economists now expect the revenue shortfall to be up to R100bn lower than the R300bn shortfall projected in October’s budget, and the deficit somewhat lower, that doesn’t make much difference to the longerterm debt arithmetic — the debt still keeps climbing to R5-trillion or more.
The cost of servicing that debt has risen to about 20% of the tax revenue the government collects, crowding out other spending.
That’s not only because the debt itself is climbing but also because of its cost — the government is paying a yield of 8.75% on its 10-year bonds, well above inflation or the real rate paid by other comparable emerging markets and far above the 1% or so in the US.
That’s the return investors demand to compensate them for the risks of lending to SA’s government. It reflects their scepticism about SA’s growth and fiscal outlooks but also directly reflects the supply/demand equation — the more bonds the government has to issue in the market, the higher the rate it has to pay to persuade buyers to take them.
That’s especially so given that SA doesn’t save enough and has to depend on foreign investors to buy some of its bonds — and foreign interest has dwindled in the past couple of years, even though there’s been a burst of enthusiasm in recent months.
One way out is to try to stabilise the debt — as the finance minister has committed to do with a fiscal consolidation package that rests mainly on an unprecedented R300bn of spending cuts over the next three years, particularly cuts to the public sector wage bill.
Even if these were to be achieved, which is far from guaranteed, debt and debt costs would still head higher, though interest costs could fall if investors give SA credit for “fiscal credibility”. They would fall too in the short term if the government cut its weekly borrowing requirement — as market players are urging it to do now that it has more revenue and more cash than it had expected.
Ultimately, though, the most durable and reliable and least painful way to stabilise SA’s debt is to achieve “growth credibility”. The budget on its own cannot solve SA’s fiscal problem. The government has to do that by implementing the reforms it has endlessly promised, but not delivered, to lift the growth rate.
It’s a measure of SA’s lack of growth credibility that markets took little notice of President Cyril Ramaphosa’s state of the nation promises last week. Until there’s tangible evidence that he is indeed making it happen, there are limits to how much fiscal credibility finance minister Tito Mboweni can earn.