We need hard decisions to avoid junk status
09 March 2016
Note to Editors: The following speech was delivered by DA Shadow Minister of Finance, David Maynier MP, during the debate on the Fiscal Framework in Parliament today.
1. Introduction
I would like to begin by expressing my disappointment that the Minister of Finance, Pravin Gordhan, is not present here today for the debate on the fiscal framework in Parliament.
We all recognize and support the important work the Minister is doing meeting investors abroad who are nervous about the prospect of a ratings downgrade to “junk status” in South Africa.
However, we feel strongly that with better planning, and with better coordination, the Minister could have met with investors abroad and been present for the debate in Parliament.
We trust this was an outlier event and we look forward to the next debate with the Minister on the budget in Parliament.
Now, we all recall that on 24 February 2016 the Minister tabled a how-to-beat-a-ratings downgrade budget in this Parliament.
The Minister was in a tight spot with very little fiscal space, and even less political space, available to respond to the economic crisis and the risk of a ratings downgrade to “junk status” in South Africa.
And the view that the Minister had a “free hand” to do what it takes seemed exaggerated, especially in view of political pressure from Cosatu.
The Minister had hardly finished tabling the budget when the lid blew off the political pressure cooker: twenty-seven questions, relating to an investigation into the SARS “rogue unit”, were sent to the Minister by the Hawks.
But the Minister fought back and launched an all out attack on the Hawks, suggesting that the investigation was politically motivated and aimed at trying to intimidate him and destabilise the economy in South Africa.
The outbreak of the “SARS wars” could not have come at a worse time as we hurtled towards “junk status” in South Africa.
2. Downgrade
Briefing top business executives last week on the prospects of a ratings downgrade, the Minister said:
“It doesn’t matter if it’s too little too late – let’s give it our best shot. Afterwards, if it’s too late, at least people will say we tried.”
This is an extraordinary statement, not only because it is dripping in defeatism, but because it contrasts with the Minister’s previous statements on the prospect of a ratings downgrade to “junk status”, which have been full of fight.
The Minister seemed, temporarily at least, to have been defeated, worn down and ground down, presumably, by the “SARS wars”.
Because, whether we like it or not, it does matter: ratings agencies are circling us like sharks, ready to downgrade us to “junk status”.
And whether we like it or not, ratings agencies do matter: a ratings downgrade to “junk status” has the potential to turn an economic downturn into an economic crisis.
Because, know this: a ratings downgrade to “junk status” in South Africa will not discriminate – whether you are rich or poor, black or white, urban or rural, employed or unemployed, you will be affected.
But don’t listen to me, listen to Standard Bank’s joint chief executive officer Sim Tshabalala, who said last week:
“The combined effect of all these pressures [rand depreciation and inflation] would make it very likely that the economy would fall into a recession and that unemployment and poverty would worsen.”
And the threat of a ratings downgrade to “junk status” is very real: Moody’s Investor Services has placed South Africa on a “review for downgrade” rating, which is a bit like being put on economic death row.
3. Budget 2016
And so we must ask ourselves whether the budget has the right stuff to avoid a ratings downgrade to “junk status” in South Africa.
The ratings agencies are monitoring several “risk factors”, including weak economic growth, fiscal consolidation and state-owned enterprises.
3.1 Economic Growth
On the first risk factor: economic growth -
The National Development Plan envisages economic growth rates at an average of 5.4% per year every year between 2010 and 2030.
However, this now seems impossible with economic growth rates being revised down: from 1.5% to 0.9% by the South African Reserve Bank; from 1.3% to 0.7% by the International Monetary Fund; and from 1.4% to 0.8% by the World Bank for 2016.
The failure of infrastructure-led economic growth is reflected in this budget: spending on infrastructure is below 10% of the GDP guideline; and spending on infrastructure as a percentage of GDP actually declines between 2016/17 and 2018/19.
Because, as someone put it: we are simply not able to convert money to bricks and mortar in South Africa.
The biggest binding constraints holding the economy back include: a shortage of electricity, an inflexible labour market and a skills mismatch.
However, when it comes to economic growth, there is very little the Minister could do, given that the structural reform needed would require fundamental changes to economic policy in South Africa.
And fundamental changes to economic policy are beyond the control of the Minister.
3.2 Fiscal Consolidation
On the second risk factor: fiscal consolidation -
The decision to fire the former Minister of Finance, Nhlanhla Nene, shattered confidence in the commitment and in the ability of government to hold the fiscal line and maintain the expenditure ceiling.
And so to avoid a ratings downgrade the Minister needed to show that, using a combination of revenue raising measures and expenditure cuts, he was absolutely committed to fiscal consolidation by:
- reducing the consolidated budget deficit to at least 3% of GDP in 2016/17;
- maintaining a consolidated budget deficit below 3% of GDP between 2016/17 and 2018/19;
- maintaining the debt-to-GDP ratio below 50% in 2016/17; and
- maintaining the debt-to-GDP ratio below 50% between 2016/17 and 2018/19.
However, although the Minister got close to meeting these targets, the fact is that:
- the consolidated budget deficit is projected to be 3.2% of GDP in 2016/17, tapering down to 2.4% of GDP in 2018/19; and
- the debt-to-GDP ratio is projected to be 50.9% of GDP in 2016/17, tapering down to 50.5% of GDP in 2018/19.
Gross loan debt is expected to rise from R2.23 trillion, or 50.9% of GDP, in 2016/17 to R2.6 trillion, or 50.5% of GDP, in 2018/19.
Debt service costs is now the fastest-growing expenditure item in the budget and is projected to be a staggering R147.7 billion (2016/17), R161.9 billion (2017/18) and R178.6 billion (2018/19).
What this means is that in 2016/17 – the current financial year – we will spend more on debt service costs than we will spend on policing (R87.5 billion) or higher education (R68.71 billion).
And that is why we need real spending cuts, rather than cost containment measures, which are important, and do send the right fiscal signals, but amount to little more than fiscal spin.
We need a comprehensive spending review aimed at identifying savings and eliminating wasteful expenditure in all three spheres of government in South Africa.
The review would have to be conducted in record time over a period of six months and would have to be completed before the tabling of the Medium Term Budget Policy Statement in 2016.
And we believe a good place to start cutting spending would be on President Jacob Zuma’s bloated cabinet, which could be reduced to fifteen ministries, saving approximately R4.7 billion per year, every year.
3.3 State Owned Enterprises
And on the third risk factor: state-owned enterprises -
The Minister announced that the findings of the Presidential Review Committee on State Owned Enterprises would be implemented; that there would be mergers, board strengthening and private equity partners at South African Airways; and that a payment, in the amount of R5 billion, would be withheld from Eskom.
All this is welcome.
But the fact is that the findings of the Presidential Review Committee on State Owned Enterprises were announced in 2013.
And there is doubt whether the findings of the Presidential Review Committee on State Owned Enterprises will ever be implemented.
In the end, the Minister could not deliver on economic growth; more-or-less delivered on fiscal consolidation; and could not deliver on state-owned enterprises.
And so it seems that the politics trumped the economics and a ratings downgrade to “junk status” is now likely in South Africa.
4. Conclusion
And so, to borrow the Minister’s favourite phrase: What do we need to do differently to avoid a ratings downgrade to “junk status” in South Africa?
The Minister has been at pains to emphasise that government, business and labour need a common purpose and must work together to avoid “junk status” in South Africa.
Indeed, the Minister is not present here today precisely because he is abroad on an investor roadshow, demonstrating that government, business and labour have a common purpose and are working together to avoid “junk status” in South Africa.
This is important work.
But, let’s be honest: the real problem is that government itself does not have a common purpose and is not working together to avoid “junk status” in South Africa.
We have the Minister of Finance, Pravin Gordhan, trying to implement the National Development Plan. But then we have the Minister of Economic Development, Ebrahim Patel, trying to implement the New Growth Path.
We have the Minister of Finance saying we need interventions aimed at unleashing the private sector rather than seeking to control it. But then we have the Minister of Economic Development doing his level best to hold back the private sector and control it through the Competition Commission.
We have the Minister of Finance trying to boost investor confidence in South Africa. But then we have the Deputy Minister of Public Works, Jeremy Cronin, crushing investor confidence in South Africa.
The day before the Minister of Finance tabled his how-to-beat-a-ratings-downgrade budget, the Deputy Minister of Public Works passed his how-to-win-a-ratings-downgrade Expropriation Bill.
We have the Minister of Finance trying to boost savings in South Africa. But then we have Cosatu threatening to strike over retirement reform in South Africa. And, of course, then we have the customary back peddling, quivering and eventual caving-in by government to Cosatu.
And that is not to mention what looks like a fight-to-the-death civil war between the Minister of Finance, Pravin Gordhan, and President Jacob Zuma, over the SARS “rogue unit”.
The truth is that to avoid a ratings downgrade to “junk status” government will have to:
- take the hard decisions necessary to avoid “junk status” in South Africa; and
- implement the hard decisions necessary to avoid “junk status” in South Africa.
That is what it is going to take to avoid “junk status” in South Africa.
The hard decisions necessary to avoid “junk status” includes at least:
- a new private sector-led economic growth strategy;
- tighter fiscal consolidation, including deeper spending cuts; and
- the privatisation, or partial privatisation, of state-owned enterprises.
But, President Jacob Zuma’s government is now so divided that it seems incapable of taking the hard decisions and then implementing the hard decisions necessary to avoid “junk status” in South Africa.
So, in the end, if we are going to get the economics right in South Africa, and if we are going to give hope to the 8.3 million people who do not have jobs, or have given up looking for jobs in South Africa, then we will have to get the politics right in South Africa.
Issued by the DA, 9 March 2016
