Ratings: stuck between Gordhan, hard place
SOUTH Africa’s credit worthiness has deteriorated over the past few years because we have lived beyond our means. National income has been constrained, compounded by exogenous shocks such as electricity shortages, labour unrest, a steep decline in export commodity prices and low business confidence.
These shocks to income occurred at a time of growing consumption expenditure — fuelled by strong government spending as it tried to cushion the economy against the ravages of the Great Recession — as well as very low interest rates and strong growth in unsecured lending.
The consequence of relatively high spending and moderating income was large and rising current account and budget deficits and rising government indebtedness.
In 2013 the current account deficit was 5.8% of GDP (R205-billion) and the budget deficit was 3.8% of GDP (R136-billion). The persistent budget deficits led to government debt rising by more than R1-trillion between 2008 and 2016 and doubling as a percentage of GDP. As a result, ratings agencies have cut our sovereign ratings to just above sub-investment grade.
The National Treasury under finance ministers Nhlanhla Nene and Pravin Gordhan has played a critical role in stabilising this dire situation. The initial strategy was to introduce expenditure ceilings on noninterest spending. This has successfully contained spending growth since 2012.
However, they failed to rein in budget deficits due to persistently low GDP growth that led to lower than expected tax revenues. Treasury capitulated and raised personal income taxes in February 2015. Further fiscal consolidation initiatives were announced in the 2016 budget.
In the four years to February 2019, the government has promised to cut spending by an additional R50-billion and raise R65-billion of new revenue. This is expected to compress the budget deficit from just under 4% in 2016 to 2.4% and stabilise government net debt at 46.2% of GDP by 2019.
Tighter fiscal and monetary policy are beginning to bear fruit. South Africa recorded a cumulative trade surplus of R7.4-billion in the first seven months of the year compared to R35-billion deficit in the same period last year. The current account deficit has narrowed as a result.
However, the government’s revenue and expenditure numbers suggest limited narrowing in the budget deficit so far this fiscal year.
And charging Gordhan — who is widely perceived as a champion of progressive, pro-poor fiscal prudence — of fraud will have economic consequences, whether or not the charges are spurious.
Depending on how this saga is managed — and untidy politics that are economically disruptive seems to have become a national competence — there are several avenues through which the economy will be affected.
First, the rand — which had depreciated by 50c at the time of writing — will continue to fall, placing renewed upward pressure on an inflation profile that was beginning to point to a better 2017. This could reignite the Reserve Bank’s cycle of increasing rates.
Second, the cost of government borrowing could rise further, placing renewed pressure on government debt servicing costs — meaning less money for education and healthcare.
Third, already fragile business and consumer confidence will decline further, hurting consumer and private fixed investment spending, along with economic and employment growth prospects.
Finally, since creditworthiness is a function of the ability and willingness to pay, the decision to charge a finance minister perceived to be leading a concerted fiscal consolidation effort with fraud hurts both.
It hurts the ability to pay by placing downward pressure on expected economic growth. It may also be perceived as further evidence of the existence of powerful forces whose priority is not prudent management of the nation’s financial resources.
All of which creates doubt in the ability of our institutions to support and deliver sustainable prudent fiscal management — making us less creditworthy and significantly increasing the odds of a downgrade.