Ma­sondo says govern­ment de­ter­mined to fix econ­omy

Business Day - - FRONT PAGE - Lyn­ley Donnelly Eco­nom­ics Writer

On the eve of the re­lease of fig­ures likely to show a flat-lin­ing econ­omy, deputy fi­nance min­is­ter David Ma­sondo said the govern­ment was de­ter­mined to take the nec­es­sary ac­tion to fix an un­sus­tain­able fi­nan­cial po­si­tion that was threat­en­ing to cost the coun­try its last re­main­ing in­vest­ment-grade rat­ing.

At a con­fer­ence hosted by JP Mor­gan Cazen­ove in Cape Town on Mon­day, Ma­sondo said public debt, which is fore­cast to reach 60% of GDP this fis­cal year, was “not sus­tain­able”. The govern­ment wanted to move away “from the re­cent trend of the fis­cal bud­get in­creas­ingly be­com­ing a bailout fund for state

owned en­ter­prises (SOEs)”, he said. His com­ments come amid pes­simism, re­flected in ris­ing bond yields, about whether the govern­ment has the po­lit­i­cal will to cut public-sec­tor pay, which con­sumes 46% of tax rev­enue, and force through re­forms of SOEs in­stead of prop­ping them up with bor­rowed money.

Eskom, which is weighed down by more than R450bn in debt, is due to get R230bn in sup­port from the ail­ing fis­cus in the com­ing decade, while the govern­ment is in the midst of dis­cus­sions about the fu­ture of SAA, the in­sol­vent air­line that is seek­ing a R2bn loan guar­an­tee to al­low it to con­tinue op­er­at­ing.

“Cur­rently, a sig­nif­i­cant part of our ex­pen­di­ture does not only go to the wage bill, but bailouts of un­der­per­form­ing SOEs. These bailouts have be­come un­af­ford­able,” Ma­sondo said.

Rat­ings agen­cies have iden­ti­fied the cost of res­cu­ing fail­ing SOEs as one of the big­gest risks to the econ­omy. Moody’s In­vestors Ser­vice, the only ma­jor agency that has SA at in­vest­ment grade, changed its out­look on SA debt to neg­a­tive in Novem­ber, sig­nalling it may cut the coun­try to junk if the govern­ment does not show enough progress in fix­ing the econ­omy in Fe­bru­ary 2020’s bud­get.

“A rat­ings down­grade will make things sub­stan­tially worse by rais­ing the cost of bor­row­ing for the govern­ment, SOEs ... this will spill over to pri­vate en­ter­prises and even­tu­ally all bor­row­ings across the econ­omy,” Ma­sondo said.

The pos­si­bil­ity of a down­grade, and po­ten­tial out­flows that deputy SA Re­serve Bank gov­er­nor Kuben Naidoo said could put as much as $8bn (R117bn) of bonds at risk of be­ing sold by for­eign in­vestors, is al­ready re­flected in the mar­ket.

Yields on 10-year bonds have risen in each of the past three months to the end of Novem­ber, and were at 9.24% on Mon­day, from 8.59% in July. The yields, which move in­versely to price, have risen de­spite in­fla­tion un­der­shoot­ing the mid­point of the Bank’s 3%-6% tar­get range. This is be­cause in­vestors are bet­ting on higher bor­row­ing costs for the govern­ment due to its dis­mal fis­cal po­si­tion.

Ma­sondo’s re­marks came a day ahead of Stats SA’s re­lease of the lat­est GDP data, which is ex­pected to con­firm that the econ­omy achieved no growth so far in 2019. Af­ter a re­bound of 3.1% in the sec­ond quar­ter, off a 3.1% con­trac­tion in the first three months, econ­o­mists ex­pect GDP to be 0% in the third quar­ter, ac­cord­ing to a Bloomberg sur­vey. Lack of growth hits tax col­lec­tion, mak­ing it less likely the govern­ment will meet tar­gets and sat­isfy rat­ings agen­cies that it can sta­bilise its fi­nances.

“We need speedy im­ple­men­ta­tion of re­formist mea­sures” to boost the econ­omy, said FNB economist Matl­hodi Mat­sei.

Lumk­ile Mondi, se­nior lec­turer at the Wits School of Eco­nom­ics and Busi­ness Sciences, said the govern­ment still had to do much more if it wanted to gen­er­ate growth of 2% in the next two years.

“An ide­o­log­i­cal bat­tle” is tak­ing place be­tween re­form­ers in Pres­i­dent Cyril Ramaphosa’s ad­min­is­tra­tion and statists, said Mondi. “Un­less we take re­form se­ri­ously, we are go­ing to be trap­ping our­selves into a low­growth econ­omy,” he said.

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