It’s on the brink we find ourselves again
Like many South Africans I was hugely relieved by President Ramaphosa’s ANC election victory in December 2017. So relieved I barely registered that my brand-new book was almost certainly dead in the water.
On the Brink: SA’s political and fiscal cliffhanger concluded that SA would continue its fiscal slide unless a new government embraced a private sector-led growth model. Like many, I assumed Ramaphosa would achieve this U-turn in time.
At the least, his election meant the country was no longer “on the brink”.
Little did I expect that by December 2019 SA’s public finances would be in irreversible decline and I would be writing that SA was back on the brink. Two years ago, I still believed that with the right leadership and economic policies the country could take off. Yes, public spending had been allowed to grow too fast, and state-owned enterprises (SOEs) had run amok for a decade, but the real problem was that growth had been too low for too long. With Ramaphosa as president, SA would surely emerge from its low-growth trap quickly.
At the time, SA’s debt ratio was about 50% of GDP — a red line for our public finances. How have conditions deteriorated so badly that it has hit 60% in just two years? And how can the outlook be so dire that the Treasury expects it to be 80% by 2027? It is already 80% by S&P’s reckoning, which factors in municipal and SOE debt.
In short, what has shifted me from thinking that SA could step back from the brink to believing that the deterioration in SA’s public finances has now become irreversible? There are several reasons. Certainly, legacy issues are one: if it weren’t for the spending shocks of free higher education (R57bn a year) plus R128bn in cumulative Eskom bailouts, the fiscal picture would look significantly better.
But there are deeper trends that seem to defy resolution.
The first involves a simple rule of thumb: when the primary balance (revenue less noninterest spending) is negative, debt will continue to mount since a country is both incurring new debt and borrowing to pay the interest on existing debt. When a positive primary surplus is sustained, debt should stabilise, then fall. The bigger the gap between the real interest rate (currently 2.8%) and the real growth rate (about 0.5%), the larger the primary surplus required.
For most of the past decade, the Treasury has been promising to run a primary surplus to stabilise the debt ratio. It has failed repeatedly because the politically hard decisions required to rationalise spending and reform the economy were never taken.
The goal of achieving a primary surplus has now been pushed out to 2025/2026. But, assuming growth remains below par, it will need R150bn in expenditure cuts, mostly to the public wage bill — an insurmountable task given the political constraints involved.
The National Union of Metalworkers Union of SA’s hysterical reaction to the appointment of the Eskom CEO, and its strike in the face of SAA’s financial meltdown, should dispel any doubt as to how this will play out. Labour will fight austerity with blind fury; there will be no detente. That leaves a growth rebound as the only way out of the fiscal death spiral. But how does Ramaphosa get growth going when SA has lost its international competitiveness, is hostage to labour and the governing party is divided over economic policy?
The upshot is that instead of a U-turn, SA’s growth model under Ramaphosa will remain state-led and rely on delinquent SOEs the debt of which will continue to redound on the fiscus. The fiscal cliff is what waits when you run out of road down which to kick the can. SA will be there sooner rather than later. I give it five years.