THE FAILURE OF FISCAL CONSOLIDATION

In a risky move, the National Treasury surprised the markets by abandoning its fiscal conservatism in the medium-term budget policy statement (MTBPS) last week. With the prospect of debt stabilisation receding, SA is back under ratings pressure.

Theoretically, it makes sense in SA’S recessionary climate to shift away from the procyclical policy of recent years (in which disappointing revenues prompted tax hikes) to a looser stance that prioritises growth over debt reduction.

However, charting a path that allows the debt ratio to blow out from 55% to 60% of GDP over the next three years is a gamble that will pay off only if it doesn’t prompt more ratings downgrades and if growth recovers. Those are big “ifs”.

Unfortunately, the medium-term budget doesn’t prioritise growth, even after the decision to shift R50bn in spending towards township and rural economies and infrastructure. Most of it goes on a bloated public sector wage bill, education, health and social spending.

Fitch Ratings is not convinced that growth will be reignited. Given the small outlay behind President Cyril Ramaphosa’s economic recovery plan, it expects the stimulus effect to be small. It also thinks that the other growthenhancing reforms contained in the plan and elaborated on in the MTBPS are “unlikely to alter the growth trajectory significantly”.

But the MTBPS has to be read in conjunction with the jobs and investment summits, which represent the first real effort in more than a decade by the government to partner with business to revive growth. That Ramaphosa slayed the term “white monopoly capital” and called business “heroes” at the investment summit last week underscores this shift in approach.

New finance minister Tito Mboweni also hit all the right notes on budget day, emphasising the need for the government to embrace the private sector and find new, joint models of funding and delivery.

He showed a refreshing willingness to slay some holy cows, including suggesting that SAA should be allowed to go to the wall if needs be, saying that SA should consider introducing fiscal rules, and stressing that the Reserve Bank’s independence and mandate must remain sacrosanct.

But the decision to allow the deficit to blow out to 4% of GDP this year and remain at 4.2% for the next two fiscal years, against the previous target of 3.6%, has rattled the markets, causing a sharp sell-off of bonds and the rand.

The weaker fiscal outlook is well below the expectations of Moody’s — the only one of the big three ratings agencies that still has SA rated investment grade.

Moody’s has described the budget as “credit negative”. Though it’s likely to delay an outlook downgrade from “stable” to “negative” until after the 2019 main budget and the elections, the political space is so narrow, and the risks building in the fiscal system so Fiscally, SA is looking exceedingly vulnerable. Sustained growth offers the only way out

significant, that there is little prospect of SA’S fiscal picture improving much in the next six months.

Citibank economist Gina Schoeman is particularly worried about the severe deterioration in the debt-to-gdp ratio and the fact that the primary deficit narrows but no longer closes in the Treasury’s forecasts (see graphs). In the absence of strong growth and low interest rates, a sustained primary surplus will be required to stabilise the debt ratio.

Sanlam Investment Management economic strategist Arthur Kamp has similar concerns: “They say it’s still an attempt at fiscal consolidation in that the primary deficit narrows, but without a marked improvement in the primary budget balance, the fiscal maths does not add up to a stable debt ratio as yet. That implies sovereign-debt ratings risk is back.”

So, has SA abandoned fiscal consolidation or just hit the pause button?

Mboweni is emphatic that SA remains committed to fiscal consolidation, and has vowed to ensure that public debt stabilises and is reduced as soon as possible. “SA must choose a path that reduces the structural deficit, especially the consistently high

What it means: Allowing debt to balloon is a gamble that will pay off only if growth recovers