Masondo says government determined to fix economy
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.