A ratings downgrade is now a matter of time

24 February 2016 

Release: Immediate

The Minister of Finance, Pravin Gordhan, was in a tight spot with very little fiscal space, and even less political space, available to him to deal with the economic crisis and the risk of a sovereign ratings downgrade ahead of tabling the budget today in Parliament.

1. Unemployment

We were disappointed that the Minister made no clear commitment to rollover the Employment Tax Incentive which lapses on 01 January 2017. We will continue to fight for a (1) speedy review of the Employment Tax Incentive and (2) a rollover of the Employment Tax Incentive between 2016/17 and 2018/19. We will not allow the budget to be balanced on the backs of young people who do not have jobs, or have given up looking for jobs, in South Africa.

2. Ratings Downgrade

We do not think that the Minister has done enough to avoid a sovereign ratings downgrade in South Africa. 

The ratings agencies are monitoring several “risk areas” including (1) economic growth, (2) fiscal consolidation and (3) state owned enterprises.

A sovereign ratings downgrade to sub-investment grade, or “junk status”, will raise the cost of borrowing, result in capital outflows, lead to further currency weakness, and increase the cost of living for ordinary people in South Africa. 

2.1 Economic Growth

The Minister announced no significant new measures to boost economic growth and create jobs and was more or less left pleading with his cabinet colleagues to implement the National Development Plan.

The primary economic growth driver in the National Development Plan is infrastructure development. A total of 10% of GDP should be spent on infrastructure development in terms of the National Development Plan. However, the budget reveals that spending on infrastructure (1) is lower than 10% of GDP and (2) will actually decrease as a percentage of GDP between 2016/17 and 2018/19.

MB2016

Infrastructure Spending [%GDP] 

2.2 Fiscal Consolidation

The Minister fell short of his commitment to fiscal consolidation and instead introduced a mix of revenue raising measures, totalling R 18.1 billion, but there were no additional expenditure cuts in 2016/17. Resulting in a fiscal deficit of R 139 billion or 3.2% of GDP, which will be reduced over the medium term to 2.4% of GDP by 2018/19.

Moreover, debt services costs have skyrocketed and are projected to be R 147.7 billion in 2016/17, R 161.9 billion in 2017/18 and R 178.6 billion in 2018/19.

We were disappointed that instead of tax increases the minister did not announce other revenue raising measures such as the sale of non-strategic state assets, which could have raised billions in revenue.

We were also disappointed that the minister did not announce real spending cuts including reducing the size of President Jacob Zuma’s bloated cabinet , which could save up to R4.7 billion.

This is why we believe the minister should announce a comprehensive spending review designed to identifying savings and eliminate wasteful expenditure and be announced before the Medium Term Budget Policy Statement in 2016.

2.3 State Owned Enterprises

We were pleased the minister announced that the finding of the Presidential Review Committee on State Owned Entities would be implemented. We welcome the minister’s commitment to find an equity partner for SAA. However, we believe the minister should have gone further by announcing the privatisation of failing state-owned enterprises, including South African Airways.

In the end, the minister did not have enough political clout to deliver on economic growth and state owned enterprises. 

And, we believe therefore that the minister has probably not done enough to avoid a ratings downgrade in South Africa. 

3. Poor Households

We were disappointed that the budget only provides for R 147.4 billion for 17.7 million grant beneficiaries in 2016/17. 

This is only a 7.5% increase, which is just above projected inflation of 6.8%, but far below projected food price inflation according to the South African Reserve Bank.

4. Immediate Challenges

4.1 Higher Education 

We welcome the fact that the minister committed additional funding to Higher Education, R 4.9 billion in 2016/17, R 5.6 billion in 2017/18 and R 5 billion in 2018/19. However, we were disappointed that the minister did not announce a further increase in funding for to provide for (1) additional funding for students who qualify for funding through the National Student Financial Aid Scheme; and (2) increases in university subsidies. 

4.2 Drought Relief

We were shocked that the Minister did not announce any significant additional funding to mitigate the disastrous consequences of the worst drought in recorded history.

The estimates are that the immediate requirements amount to R 4.2 billion in 2016/17. Unless this issue is dealt with, there will be severe consequences for the availability and prices of food for all South Africans and particularly poor households.

5. Conclusion

To get the economics right, the minister had to get the politics right. 

But, the Minister’s capacity to do things differently was limited by the political space available inside the ANC/SACP/COSATU alliance. 

With both hands more-or-less tied behind his back we think that, in the end, the minister was not able to do enough to avoid a ratings downgrade in South Africa. 

Statement issued by David Maynier MP, DA Shadow Minister of Finance, 24 February 2016