Pressure mounts for government to cut costs
PRESSURE from the business community is mounting for the government to announce expenditure cuts in October’s Medium-term Budget Policy Statement in an effort to arrest the unravelling of the country’s economy.
Old Mutual Investment Group chief economist Johann Els told journalists yesterday that it would be ideal if the government could get expenditure cutbacks of close to 5 and 6 percent in the medium-term budget.
“We want that indication in the medium-term budget already. That is also why Moody’s say they are waiting for the February budget as a great indication, but they want this message to come through in the October budget,” Els said.
Rating agency Moody’s on Tuesday gave South Africa a reprieve, saying it was unlikely to downgrade the country’s debt rating. However, it cut the country’s growth forecast to 0.7 percent from 1 percent in June.
“It (the mini-budget) is a crucial one. We cannot continue the pattern of the last few years where the mini budget is just anything,” he said.
Els yesterday forecast a downgrade at the end of next year.
“My probability of a 60 percent chance of a Moody’s downgrade by the end of next year is premised on no better news in terms of an Eskom plan,” he said. “No improvement in terms of budget cutbacks. If there is good news on those two fronts, then Moody’s will likely not downgrade the outlook.”
Els also warned that additional support for Eskom would also raise the country’s fiscal risk at a time when it had a significantly higher fiscal deficit, due to Eskom’s debt and a weak economy.
“We are therefore facing an increased risk of a credit downgrade, despite Treasury’s new economic plan,” Els said.
Eskom is struggling under mounting debt of R450 billion and received a R59bn bailout through the Special Appropriation Bill that provides for a bailout of R59bn, to be paid as R26bn in 2019/20 and R33bn in 2020/21.
The bailout is in addition to the R23bn a year for three years, which was included in the 2019 budget.
Els painted a fairly dismal picture of South Africa’s current economic scenario, with an increase in perceived negative news causing general depression about the country’s outlook.
“We saw a much worse than expected first quarter gross domestic product result, although there was a strong rebound in the second quarter data,” he said.
“That said, the significantly slower-than-hoped for policy reform is leading to intensifying anxiety and frustration across the country.”
Els said the perceived bad news such as the National Health Insurance scheme and the associated costs this would bring, the debt relief bill and talk of prescribed assets was only serving to take the country backward in terms of policy reform.
Siboniso Nxumalo, Old Mutual Group head of equities, noted that South Africans were looking to take their investments offshore.
“Going offshore during crises can destroy value. Just consider the many South African companies that have struggled to invest successfully offshore.
“Most of these deals have eroded value in the companies,” he said.
“In contrast, South African equity during crises – especially when bought at attractively low valuations – has historically been shown to generate positive returns, even throughout the tough (former president Jacob) Zuma years,” he said.