Gigaba cannot sweet-talk the country’s growth rate
Finance Minister Malusi Gigaba is a quick study and he has beaten a rapid retreat from his initial April 1 comments, with their focus on radical economic transformation and their critique of Treasury’s orthodox economics and its ties to international investors.
As he flies off to this week’s spring meetings in Washington, where he is going to meet a lot of very orthodox and very big-league economists, not to mention a lot of international investors, he is saying all the right things to investors at home.
He has emphasised that foreign investment was critical, as was local investment, and that he was working hard to avert further ratings downgrades. He has made reassuring noises about continuity in the Treasury and he has underlined his commitment to staying on the path of fiscal consolidation, promising that the budget deficit will narrow as planned over the next three years.
Investors in Johannesburg and in Cape Town evidently wanted to hear a good story, and this one seems to have gone down well. As, we hope, will the story the minister tells in Washington and New York.
But he should not make the mistake of falling for his own spin, because it’s becoming increasingly hard to see how he can deliver on those fiscal promises. Even if he put fiscal policy on autopilot and simply left the old minister’s framework in place, Gigaba faces a new set of risks that will have to be monitored and managed with care and skill.
Growth is the first of the risks. The February budget deficit targets were premised on growth picking up to 1.3% in 2017 and 2% in 2018. Now even those modest rates are looking optimistic. Recent poor manufacturing and retail figures, combined with the downgrade, have had economists talking “technical recession”, with the possibility of a second quarter of negative growth. The IMF had been more gloomy than most on the growth rate but its 0.3% forecast for 2016 proved to be spot on and so chances are its 0.8% for 2017 could be right too — though some economists are pencilling in forecasts that are even lower.
As it is, the IMF warned in its latest World Economic Outlook that emerging markets might face a less supportive global environment than they experienced for long stretches of the post-2000 period. So SA’s meagre growth expectations are at risk of running into global headwinds, especially if nothing is done to make the domestic environment more growth friendly.
A shortfall on growth targets means shortfalls on revenue collections. That’s a possibility anyway, after the recent 2016-17 numbers from the South African Revenue Service (SARS) showed the agency hit its target only thanks to a dividend windfall, making the 10.5% revenue increase projected in the February budget for 2017-18 look wildly optimistic. A revenue shortfall would mean the new finance minister would have to cut spending, or raise taxes even more than the old finance minister did, to deliver on those deficit targets.
Gigaba has talked, as did predecessor Pravin Gordhan, about finding more money in the existing spending envelope to fund government’s priorities. In practice, that means taking money from one department to give to another — or forcing departments to scrap some projects to fund others. It’s hard to stay popular that way, as Gigaba will discover.
It’s even harder in a context in which the spending side of the budget is under pressure from a variety of sources, of which the ratings downgrades are one. Paying the interest on the government debt already consumes 13c of every R1 of revenue raised, and while the downgrades won’t affect the interest on most of the existing debt, the new debt will be costlier.
If the deficit widens, SARS will need to raise even more, which is one big reason to go out there and hustle ratings agencies and investors. SA’s real fiscal story since 2010 has been that the government managed to keep growing spending by doubling its debt to R2.2-trillion. That’s how foreign bond-market investors came to own more than 35% of rand-denominated government debt, triple the 2009 level. And that’s how SA came to be so vulnerable to ratings downgrades and international investor sentiment, even though its foreign debt is very modest by emerging-market standards and its domestic debt level is still manageable.
Keeping those foreigners on board if things go badly could well mean Gigaba has to look at spending cuts or tax hikes or both. He may have more political support than Gordhan did, but that comes with more pressure to spend and run up the debt level.
There is always (shriek) the serious banana republic option of printing money. But as long as the current team at the Reserve Bank is in place, that is not going to happen. Fortunately, emerging markets are in vogue for now, capital is flowing, the rand is holding up amazingly well and investors are hearing what they want to hear. But that can turn quickly, and savagely.
Fortunately, too, it’s still a long time until October, when Gigaba will have to present his medium-term budget and update the fiscal figures. Meanwhile, he is no doubt discovering just how much of a poisoned chalice his new portfolio can be. We can but wonder how long it will be before he starts saying, as Gordhan used to: “I didn’t ask for this job.”
HE MAY HAVE MORE POLITICAL SUPPORT THAN GORDHAN DID, BUT THAT COMES WITH MORE PRESSURE TO SPEND AND RUN UP THE DEBT LEVEL