State bank fantasy withers credibility

The reaction to finance minister Tito Mboweni’s budget was in a way typical. Initially the markets were impressed by the statement of intent, as indicated by the rand’s strength.

But it didn’t take long before attention shifted to implementation risks and the probability that they were based on assumptions that were too optimistic. While GDP growth of 3.3% in 2022 followed by an average of 1.9% in the following two is hardly anything to shout about after the Covid-19 economic shock, many economists don’t believe it will be achieved.

They at least acknowledge that it’s subject to a high level of risk, with the possibility of new Covid-19 waves and lockdowns despite the vaccination process having started, and the possibility that structural reforms that are supposed to boost the economy won’t be forthcoming.

The ratings agencies have already expressed scepticism that the government will manage to limit debt as a proportion of GDP to less than 90% in the next five years. Most important is the risk that some of the steps envisaged in the budget, such as the cut in the public-sector wage bill, will be too politically unpalatable for the government. Based on past promises that have not been delivered upon, the government is rightly perceived to have low credibility, something that hasn’t been helped by its inconsistent messages.

The cause will not have been helped by President Cyril Ramaphosa’s comments on Friday, which served to highlight the government’s credibility problem. On the one hand, markets will have been encouraged by the president vowing to stick to the hard choices in the budget, such as the below-inflation increase in social grants, because all of this “has to be seen in the context of affordability”.

He told the SA National Editors Forum that SA is going through a “very difficult time”, that there have to be trade-offs and that the country had to act to arrest an alarming increase in debt-service costs. While that might be hard to take for recipients of grants, he can plausibly make the argument that the country doesn’t have a choice. What might be harder to accept is that within the same engagement the president spent much time talking about the need for a state bank, a pet project that’s also the favourite of the finance minister.

So in the midst of this fiscal crisis and real cuts in the incomes of the poor, one is to believe that the government is also seriously considering forming yet another stateowned company to solve a problem that doesn’t exist.

Despite the entrance of new players, such as Patrice Motsepe’s TymeBank and

Adrian Gore’s Discovery Bank, the president believes the industry is dominated by a few players. He also called them too risk averse, even suggesting that the failure of his bank guarantee scheme to support Covid-19-hit companies was their fault. His comments gave the impression that he actually believed the government had provided R200bn, which the banks had failed to distribute, which is not the case.

When one considers how well SA’s banks — which are consistently cited by ratings agencies as among SA’s main strengths — have weathered the Covid-19 crisis, one would argue that a little risk aversion is not a bad thing. It is after all their job to look after depositors’ money. CEOs might also find Ramaphosa’s criticism hard to stomach in the light of the disaster his government has presided over with regard to the management of state-owned enterprises, most of which depend on bailouts.

The president also did not acknowledge how local banks have come to the government’s rescue as foreign investors have reduced their activity in the local bond market in the wake of the country losing its last investment-grade rating in March 2020.

According to the Budget Review, local banks held 22% of government bonds as of December, up from 16.8% in January. It went on to acknowledge that the government was therefore one of the biggest risks to the country’s banks.

“Any deterioration in the quality of this government debt would expose the banking sector to systemic risks,” the Treasury said, alluding to the so-called doom loop between banks and the sovereign.

That was demonstrated during the European sovereign debt crisis that saw huge piles of government debt held by private banks fall in value. That then triggered credit downgrades for the banks, increasing their borrowing costs and harming their ability to lend, which then slowed economic growth. The president should not be attacking the country’s banks for doing their job, and doing it properly.

Arguments about why a state bank would be a bad idea have been spelt out before, such as how a government that’s drowning in debt will fund such an exercise. As it has been pointed out before, such an institution will face capital requirements that are stated on the Prudential Authority’s website.

I suspect the government is well aware of all of this, and there’s no prospect of such a state bank being formed. Talking about it does one thing. That is to damage the government’s credibility and highlight in investors’ minds the implementation risks of Mboweni’s well-intentioned plans on cutting debt and managing structural reforms.

THE PRESIDENT SHOULD NOT BE ATTACKING THE BANKS FOR DOING THEIR JOB