Finance minister Tito Mboweni delivered a shocking medium-term budget policy statement (MTBPS), with the budget deficit set to be two percentage points higher on average over the next three years than forecast just eight months ago.
While ratings companies and financial markets may welcome realistic revisions for growth and debt, they may be left disappointed by the lack of details on action to reverse the trend even as Mboweni said “the consequence of not acting now would be gravely negative for SA”.
Many of the hard decisions on spending and potential tax changes have been deferred to the main budget, which is normally unveiled in February.
The rand weakened within moments of Mboweni starting to speak. At 2pm it was at R14.60/$, while five minutes later it had softened to R14.75. This move pushed its losses for the day to 0.93% to the dollar. At the same time it had fallen 0.96% to R16.4207/€ and 1.4% to R19.0789/£.
The generic 10-year government bond also suffered, with the yield rising 20 basis points to 9.112%. Bond yields move inversely to their prices. If it ends the day at this level, it will be its worst close in more than two months.
The government pencilled in just R21bn of spending cuts for 2020/2021, less than the R56bn allocated to Eskom for that year. There were no concrete plans for the restructuring of the utility’s R450bn debt, while the Treasury said Eskom could receive further funding above the R230bn of support set aside for the next decade, provided it meets certain conditions.
“We cannot continue to throw money at Eskom,” Mboweni said in his speech released before his address to parliament.
“For the sizeable support required, it cannot be business as usual,” he said, demanding that the utility improve the running of its current plant and equipment, and cash management and fast-track the break-up of the company into three units.
In a sign that the Treasury is yet to win political support across the government for measures that it says are needed to get state finances on a more sustainable path, including R150bn in spending cuts and revenue raising over three years, it emphasised the dire state of government finances and the need to act urgently, partly in the hope that the grim forecasts will act as a wake-up call for other departments.
Moody’s Investors Service, which is due to give a scheduled update on SA’s rating on Friday, may see this as another sign of government kicking difficult decisions down the road. No ratings cut is expected, though the agency may change the outlook from stable to negative. Moody’s is the only major rating company with an investment-grade on SA’s debt, a loss of which may lead to billions of rand exiting the country’s bonds and weaken the rand.
The Treasury downgraded its 2019 growth forecast to 0.5% from 1.5%, even lower than the SA Reserve Bank’s 0.6% prediction, with the government expecting only a “gradual recovery in confidence and investment” in coming years. The economy will then expand by 1.2%, 1.6% and 1.7% in the three years through to 2022, well below the levels that economists say are needed to deal with an unemployment rate close to 30%.
With revenue collection by the SA Revenue Service (Sars) set to be R53bn less than the figure in February, bringing under-collection since 2018/2019 to R110bn, the budget deficit will balloon to 5.9% in the current fiscal year, averaging 6.2% over the next three years compared with the 4.2% forecast in February.
“In the decade since the global financial crisis, government has run large budget deficits, raising its borrowing and making the increase in SA’s debt-to-GDP ratio among the highest of peer countries. This approach cannot be sustained,” the medium-term budget policy statement said.
Debt as a percentage of GDP, which the government had previously predicted would peak at just more than 60% in 2023/2024, is now expected to climb to 71.3% a year earlier. Depending on the amount of financial support needed by Eskom, the ratio could climb to almost 80.9% in 2027/2028, up from less than 50% four years ago.
The state conceded that it was unlikely to convince commercial banks to reschedule SA Airways’ government-guaranteed debt of R9.2bn and that it will most likely have to step in and repay the debt in line with its contractual requirements. The airline has accumulated more than R28bn of losses in the past 13 years and is, “in its current configuration, unlikely to ever generate sufficient cash flow to sustain its operations”.
While Mboweni’s statement was notable for its lack of specific measures, it flagged possible tax increases and reining-in the growth in public sector wages as possible ways of addressing the deterioration in public finances. That and the crisis at Eskom threaten to divert spending away from existing levels of service provision and infrastructure investment.
Mboweni said discussions would have to take place with labour about the public sector wage bill between now and the February budget. Options to be considered include pegging cost-of-living adjustments at or below CPI inflation, halting automatic pay progression and reviewing occupation-specific dispensations for wages.
A substantial reduction in the wage bill is needed, Ian Stuart, the acting head of the budget office, told reporters.
Mboweni noted that 29,000 public servants in addition to cabinet ministers, MPs and members of the provincial legislature earned more than R1m last year. The average wage increase across the government was 6.8% in 2018/2019. After adjusting for inflation, the average government wage has risen by 66% in the past 10 years and the wage bill accounts for 35% of the consolidated budget.
Mboweni announced a salary freeze for cabinet ministers, premiers and MECs at current levels with the likelihood of an adjustment downwards. Caps will be placed on perks.
“There is no status quo option. The consequence of not acting now would be gravely negative for SA. Over time the country would likely face mounting debt service costs and higher interest rates and may enter a debt trap,” Mboweni said.
Debt service costs, the fastest area of spending, will amount to R204bn this year
“On our current trajectory by the end of the three-year framework, debt service costs will be bigger than spending on health and economic development”, which is not sustainable, he said.
The Treasury has set a target of achieving a main budget primary balance by 2022/2023, excluding support to Eskom. A main budget primary balance is when revenue equals non-interest expenditure. Real main budget non-interest spending grows at 1.2% in 2020/2021 and 0.1% in 2021/2022.
To bolster the fight against corruption the National Prosecuting Authority (NPA) will get an additional R1.3bn over the next two years and Sars an additional R1bn.
Correction: October 30 2019
A previous version of this article stated that Eskom would receive R33bn in assistance during the 2020/2021 financial year. It is set to get R56bn from government in that period.
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