The fiscal package President Cyril Ramaphosa announced on Tuesday will keep the economy on life support as it battles the collapse in growth and business activity due to the Covid-19 pandemic, say economists and analysts
But questions abound on how exactly the R500bn rescue package will be constituted and what it will mean for the already ballooning budget deficit and government funding requirements. Finance minister Tito Mboweni is expected to provide more detail in an adjustment budget, though when it will be tabled is not clear.
Assessments from economists who spoke to Business Day range from the package being effectively budget-neutral to others foreseeing a gap of between R70bn and R172bn. Whatever the gap, the Treasury will have to borrow it at a time when government bond yields have spiked into double digits, raising the cost of borrowing, after coronavirus-inspired turmoil forced the SA Reserve Bank recently to intervene by buying government bonds to ease market pressure.
Nevertheless, the broad aims of the package — which has to steer SA through a recession that the Bank estimates will cut growth 6.1% — are the right ones.
“The intent was certainly in the right place, the instruments being used are the right ones and I think from the perspective of limited resources it is what government could credibly put together,” said Sanlam investments chief Economist Arthur Kamp.
Alongside funds from local sources such as the Unemployment Insurance Fund (UIF), Ramaphosa also announced SA would source some of the money from multilateral agencies including the International Monetary Fund (IMF) and the World Bank.
Kamp calculates that the government could be faced with a gap of roughly R70bn, based on the assumption that R100bn set aside in the package for jobs protection and creation is fully funded through the UIF, which the government has yet to make clear. This shortfall could be financed through international bodies such as the IMF, said Kamp, with limited conditionality.
Before the announcement, Kamp expected the budget deficit this year to reach 12%, but he says that these measures could take the deficit to about 13.4%.
Momentum Investments economist Sanisha Packirisamy said that the government could need to raise between R70bn and R100bn, depending on how much funding could be sourced from various multilateral agencies. This could add 3%-4% to the coronavirus-hit budget deficit, which she estimated could leave it at nearly 15% of GDP.
This posed the risk that the government could push for prescribed assets and steer the coercion of private pension funds to fund itself, she said. Other elements of the plan, such as the temporary additions to grants also needed clarity, she said.
“Historically, in many geographies, it has always been a battle to take back social grants.” SA may find this hard to do, especially with the country likely to experience negative growth for some time to come, she said.
Nolan Wapenaar, co-chief investment officer at Anchor Capital, said the plan could prove to be largely budget neutral, though this also assumed that the UIF funded the full R100bn on job protection and creation measures. Intervention notwithstanding, SA faced a particularly tough few months.
“I liken this to putting the economy on life support while we try to get our economy up and running,” said Wapenaar.
Bloomberg reports Trudi Makhaya, Ramaphosa’s economic adviser, as saying on Tuesday that the state should be able to fund the package through the existing budgets and financing from multilateral agencies, and would no necessarily have to turn to private lenders.
“I don’t say private markets are closed to us,” but the government would want to keep the amount it taps from them to a minimum, Bloomberg quotes her as saying.
But Bureau for Economic Research chief economist Huge Pienaar said that direct revenue and spending measures, excluding loan guarantees and spending reprioritisation, totalled R172bn, and could push the budget deficit towards 14.4%.
“We doubt whether the private capital markets will be able to absorb the extra bond issuance required to finance such a deficit,” he said. In the light of this, the government’s openness to approaching global lending institutions was “a positive step”, said Pienaar.
But despite having access to this type of concessional finance, “the scars of Covid-19 on GDP, social welfare and debt dynamics will be seen for a long time”, he said.
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