ANC’s flip-flopping puts economy at risk

When facts change, I change my mind. What do you do, Sir? These words may or may not have been uttered by John Maynard Keynes, one of the most influential economists of the 20th century. But they are highly relevant in the context of the cabinet lekgotla that took place last week.

Keynes was most famous for his advocacy of the use of fiscal and monetary policies to counter the effect of economic recessions in order to boost demand and employment. So on the face of it, President Cyril Ramaphosa’s announcement that the government would initiate a stimulus package seems reasonable.

After all, the announcement came shortly after the release of yet another depressing report from Statistics SA, showing that the official unemployment rate had increased to above 27%, with a loss of 102,000 jobs in the second quarter.

But then a closer look at the numbers just seems to confirm the muddled thinking in the administration.

The country’s job crisis is hardly something new. In fact, the unemployment rate is slightly lower than it was in the second quarter of 2017, when it came in at 27.7%, with the number of employed people marginally higher.

Barely six months ago, about a week after Ramaphosa became president, then finance minister Malusi Gigaba presented what was essentially an austerity budget, citing the country’s “enormous economic and fiscal challenges”. It predicted that revenue collection would fall short by about R48bn and described the finances of several state-owned enterprises (SOEs) as being in a “precarious state”. That budget, presented as a response to the previous year’s medium-term budget policy statement, which had highlighted the need for “extraordinary measures” to stabilise the public finances, is probably most remembered for the increase in VAT. The basic message was that there was no money in the kitty.

Anyone who has been following the news on SA Airways and Eskom will know that as far as the SOEs are concerned, the facts have largely not changed. And where they have, it’s been for the worse, with Eskom’s stateguaranteed debt now at about R350bn, equivalent to about 9% of the whole economy. Eskom’s finances were in such a terrible state that the company felt compelled to freeze wages, only to be overruled by politicians who panicked after a few days of strikes and violence.

By last week it had offered a 7.5% increase. Anybody who lent money to Eskom based on its previous stance will rightly be worried about the company’s ability to meet its financial obligations, something that was reflected in capital markets, with its 2025 eurobonds falling each day last week and pushing the yield to a three-week high.

Government finances overall are not looking great, so that need for “extraordinary measures” can hardly be said to have abated. And there is, of course, the public sector pay deal that is set to overshoot the budget by about R30bn.

Data for the three months to June show the SA Revenue Service’s revenue is falling behind schedule, increasing the risk that the country will miss the 3.6% estimate for 2018/2019.

Sanlam Investment Management economist Arthur Kamp was quoted in Business Day last week as predicting that budget shortfalls this year would be manageable and were unlikely to raise fresh concerns for ratings agencies — based on the available information.

Following up on Ramaphosa’s announcement earlier in the month, when he also announced that the ANC had decided to propose changes to the constitution to make it more explicit on expropriation of land without compensation, finance minister Nhlanhla Nene apparently told the cabinet last week that the government would need an extra R43bn to fund the extra stimulus.

While in absolute terms the number is not huge, less than the R57bn allocated in the last budget to pay for free higher education, it still needs to be raised somewhere and one can only assume that it will be done through borrowing, at a time when the meltdown in Turkey’s financial markets is pushing bond yields higher across emerging markets, including SA. That’s not an academic point because higher borrowing costs mean less money for other things, potentially undermining the effectiveness of any stimulus package.

The debate about stimulus and whether SA can afford it has been going on since the days of Thabo Mbeki and Trevor Manuel, when the Gear policy attracted the ire of the ANC’s alliance partners.

There is a view that SA’s debt, while it has grown over the years, is not the country’s biggest crisis. Rather, growth and unemployment are, and the country should be brave enough to ignore the ratings agencies.

While there are no details on the new stimulus package, it seems too small to achieve its stated aims and has a look of electioneering about it, meaning that there is a risk that it will just undermine the government’s fiscal credibility at a time when we can least afford it.

A CLOSER LOOK AT THE NUMBERS JUST SEEMS TO CONFIRM THE MUDDLED THINKING IN THE ADMINISTRATION