Stabilisation or starvation
Duma Gqubule on saving SA’s economy
● The government’s response to the country’s largest depression in a century is totally inadequate. The time has come for the Reserve Bank and the Treasury to develop a R1-trillion stimulus package to stabilise the economy and finance a recovery.
Since the beginning of 2020, the Bank has cut interest rates by 275 basis points. During the emergency budget last month, the Treasury announced a R36bn increase in non-interest expenditure to counter the devastating impact of the lockdown. In other words, the R500bn stimulus package that President Cyril Ramaphosa announced on April 21 does not exist.
This combined response from the Bank and the Treasury would have been inadequate to counter the crisis before the crisis. Before the lockdown, the country was heading for its third recession in three consecutive years. There had been three consecutive quarters of declining GDP, the value of all goods and services produced in the economy.
The supplementary budget review says SA had gross loan debt of R3.3-trillion at the end of March, which was equivalent to 63.5% of GDP. After excluding government cash balances of R263.6bn, net loan debt was about R3-trillion. This was equivalent to 58.4% of GDP. This was not a high level of debt by international standards, even when benchmarked against SA’s middle-income peers.
According to the International Monetary Fund (IMF), the world average debt-to-GDP ratio will increase by 19 percentage points to 101% of GDP from 82% a year ago. The world average budget deficit-to-GDP ratio will increase to 14%. The Treasury says SA’s debt ratio will increase by 18.3 percentage points to 81.8%. The budget deficit will increase to 14.6% of GDP. This means that the increase in SA’s debt burden will be exactly the same as the world average. In relative terms, it will be where it was before the crisis.
Since February, the Treasury has announced austerity measures — tax increases and budget cuts — of R600bn to reduce the country’s debt burden. However, this unprecedented austerity will have the opposite effect. It will deepen and prolong the crisis, reducing GDP growth and increasing the country’s debt ratio. Unemployment, already at 40% according to the expanded definition, could soar to above 50%, at which point the whole society will become unviable.
There are three alternatives. As the parliament’s finance committee said last week, SA Inc must use its entire balance sheet to finance a stimulus and recovery plan. The balance sheet includes assets within the Public Investment Corporation (PIC) of about R1.9-trillion at the end of March 2020, according to my estimate, foreign exchange reserves of more than R900bn and cash of R263.6bn. The foreign exchange reserves are equivalent to about eight months of imports compared with an international benchmark of three months.
First, the Reserve Bank can release half of its foreign exchange reserves, equivalent to about R450bn, into the economy. It can implement quantitative easing, which refers to the purchase of government bonds on the secondary market, where existing debt instruments are traded. It can directly finance government spending by purchasing government bonds on the primary market, where new debt instruments are issued.
The Bank can also finance government spending at no cost. “This is the cheapest, quickest and easiest method of financing a stimulus. It is essentially free,” says Owen Willcox, an economist who previously worked for the Treasury. With the economy set to contract by at least 10% during 2020, according to most forecasts, there is too little money chasing too many goods. By definition, there cannot be an inflationary threat during a depression.
Second, the level of funding in the PIC, the asset manager for the Government Employees Pension
Fund (GEPF) and the Unemployment Insurance Fund (UIF), is obscene in a country with such high levels of poverty. The GEPF is fully funded with assets of about R1.6-trillion at the end of March 2020, according to my estimate. It has enough assets to pay all 1.3-million public servants if they retired on the same day. The GEPF has an annual surplus — income (contributions and investment income) minus expenditure — of almost R60bn.
After paying R40bn to workers who were temporarily laid off due to the lockdown, the UIF will have a surplus of R110bn. There are many options for a once-off restructuring of the SA Inc balance sheet.
In a recent paper, Mike Sachs, a Wits professor who used to be the Treasury’s budget director, said drawing down the cash balances would allow the government to finance itself without going to the bond market for eight months. A contribution holiday at the GEPF would release R75bn a year. The UIF surplus could be unwound to zero. Another option, my proposal, would be to reduce the PIC’s assets by half, or about R950bn. Under this scenario, with 50% funding, the GEPF’s annual surplus would still be R15bn a year. This would allow the PIC to write off state debt of R500bn and state-owned company debt of R200bn. The PIC could then release more than R100bn into the economy.
Third, SA can have an investment-for-growth accord with the financial sector, where institutional investors had assets of about R9-trillion at end-2019. Excluding unit trusts, there could be assets of R5trillion after taking into account the decline of share prices this year. A portion, say 10%, could be directed towards impact (or developmental) investments that create jobs in sectors such as renewable energy, gap housing or tertiary accommodation.
There are obvious concerns about the capacity of the state to implement such a large stimulus package. Academics Mark Swilling and Gael Giraud have proposed “ring-fenced institutional arrangements that blend public and private funding”.
In the wake of the Great Depression during the 1930s, US president Franklin D Roosevelt’s New Deal established more than 14 alphabet agencies to implement ambitious “relief, recovery and reform” projects. Today, SA must implement its own New Deal.