SA in financial crisis
Worst GDP in a century, $1bn bailout could have serious implications, Mboweni on ropes
SOUTH Africa received a financial boost of $1 billion (R17bn) from the New Development Bank, formerly known as the BRICS Bank, to help government mitigate the social and economic bloodbath caused by the Covid-19 pandemic.
However, experts have warned Finance Minister Tito Mboweni to be careful of the terms of the agreement.
The loan, which was approved on Friday, came days before Mboweni was expected to deliver what’s arguably the most complicated special adjustment budget, on Wednesday.
National Treasury said it would contribute towards the provision of critical health-care resources and strengthening the country’s social safety net.
“The positive impacts will include improving the resilience of the public health sector and health emergency response systems, and facilitating socio-economic recovery,” it said.
The repayment terms and conditions were yet to be divulged as both parties were still working on final technical and administrative requirements.
Treasury said final details would be published once all the processes had been concluded.
According to the New Development Bank, the loan was aimed at preventing, detecting and responding to the health threat posed by Covid-19, and providing social grants to vulnerable groups affected by measures implemented to prevent and contain the disease.
The BRICS Bank was founded in 2014 by Brazil, Russia, India, China and South Africa.
South Africa is the third country to receive a loan from the institution as a result of the Covid-19 outbreak; China and India have already benefited.
Mboweni has been urged to announce stringent measures to resuscitate the ailing economy.
Sakhile Hadebe, an international relations lecturer from the University of Kwazulu-natal said it was good that the country was reaping the benefits of being a BRICS member but warned of “undisclosed” terms and conditions.
“The country is in a crisis, any assistance is welcome although it may be risky. It is an open secret that these international institutions we belong to have an interest in our country. It will be interesting to know the condition of this loan,” he said.
The fight against Covid-19 forced the government to reprioritise public funds in response to the economic downfall caused by stringent lockdown rules.
President Cyril Ramaphosa announced a R500bn Covid-19 relief fund to assist small, medium and micro enterprises, for wage protection (Unemployment Insurance Fund), municipal support, health and other front line services, and R130bn was to come from the February budget.
Last month, Mboweni asked Parliament to table a special adjustment budget. Experts said Mboweni was caught between a rock and hard place.
Economist Mike Schüssler said the economy was in a deep hole with the country’s worst gross domestic product (GDP) since 1920.
“Our first quarter was negative and the second will be worse. I have economic data from the early 1900s and it has never been this bad. Wednesday is vital in establishing the groundwork for improving third and fourth quarters.”
Schüssler said he knew Mboweni would announce there was a large deficit but he had to divulge what the government would do to close the gap.
“Sars (SA Revenue Services) has announced an R285bn decline in revenue, but we intend to spend R500bn to address Covid-19. So what was originally 6% could be as high as 15%. The economy must account for this half a trillion rand in spending as well as our fixed expenses such as education.”he believed Mboweni would suggest plans for bailing out municipalities and civil servant pay increases should either be minimal or remain unchanged.
“The private sector has suffered from a bloodbath of job losses, salary cuts and closures, yet people will still need to pay lights and water bills which will increase to support salary hikes.”
Bernard Sacks, a tax partner at Mazars, said the projected deficit was high, at R370bn and the debt-to-gdp ratio was projected to grow to 65% while a predicted growth rate of about one percent was predicted.
“The government has lost out on billions as no excise duties or VAT on tobacco products have been collected since the beginning of lockdown and until the easing to level 3, a similar situation prevailed regarding liquor products.”
Sacks said estimates of the projected recovery period varied, but was likely to take a minimum of three to five years as the extent of the contraction of the economy was unknown.
In its latest Global Economic Prospects report, the World Bank said the coronavirus pandemic had caused the broadest collapse of the global economy since 1870.
It said the world economy was expected to contract by 5% this year, the worst recession in 80 years, but the number of countries suffering economic losses meant the scale of the downturn was worse than any recession in 150 years.
Dawie Roodt, a chief economist at Efficient Group, said Mboweni had almost nothing in the fiscus and would struggle to strike a balance in the funding requirements of the state. He said it was the first time Mboweni would present a supplementary budget.
“Is it going to be a socialist or business-friendly budget? This is going to be a socialist, left-leaning budget.
“State revenue is under pressure. Company taxes will be hard hit because the economy is slowing down. VAT will also be hard hit because people are not buying,” said Roodt.
He said there could be increases in taxes and VAT and additional spending on social grants.
FINANCE Minister Tito Mboweni has warned that the country’s budget deficit would rise to unsustainable levels in the next four years if the government did not curb further borrowing that could push an already weak fiscal position to the brink of a debt crisis.
Mboweni told Parliament this week, ahead of his emergency budget on the fiscal impact of the coronavirus (Covid-19) pandemic on Wednesday, that the National Treasury would make “very serious and unusual changes” to its expenditure plans.
“We can no longer spend the way we were spending before.
We are much, much poorer and therefore all of us have to adjust our expectations,” Mboweni said.
“A sovereign debt crisis is a very serious matter and we are looking it in the eye by 2024 if we do not redo our budget, if we do not manage our house finances carefully.”
Mboweni’s revised fiscal framework would account for substantial revenue losses emanating from the economic shock of the pandemic and the lockdown.
The SA Revenue Service has forecast that tax collection will be around R285 billion lower than previously expected, adding pressure on already weak growth domestic product (GDP).
Most economists project that the revenue shortfall and the recently announced R500bn stimulus package would drive the fiscal deficit into double-digit territory for this year and the next.
Investec’s Kamilla Kaplan said this special adjustment budget was likely to outline a significant deterioration in fiscal ratios.
“We expect a substantial revenue shortfall, increased spending pressures and a contraction in nominal GDP growth will yield a 2020/21 consolidated budget deficit of 15 percent of GDP, versus National Treasury’s original forecast of a 6.8 percent of GDP deficit,” Kaplan said.
Mboweni said the government wanted all expenses justified for each new period under the proposed zerobased budgeting.
He said the process would involve matching each expense item with a justifiable reason for the corresponding period, adding that the government needed to review its expenses to avoid a fiscal slippage.
“If we don’t do this, by 2024 this country will be in a situation where the debt to GDP ratio will be higher than the GDP of the country,” he said. “In simple technical economic terms, that means we are going to be in a sovereign debt crisis.”
Old Mutual’s Johann Els said the zero-based budgeting was still a proposal that was doubtful on whether it could be implemented in the near future.
“A zero-based budgeting approach is another potentially good opportunity to reduce wasteful expenditure, which will send the right message to foreign investors,” he said, adding that the pandemic could also provide a good opportunity for a rethink.
“We will hopefully look back on the response to the pandemic as the start of a long-desired turnaround,” he said.
South Africa’s stubborn expenditure items such as the ballooning public sector wage bill and mismanaged state-owned enterprises have added significant pressure to the fiscus.