Gordhan juggles doing more with insufficient resources

Having to do more, with not enough resources to do it properly, is always going to be tricky. This was the challenge facing Finance Minister Pravin Gordhan as he delivered the budget for 2017-18. Introducing a new income tax bracket for high income earners and compliance with the Common Reporting Standard would see the assets of South Africans held offshore disclosed more accurately, and taxed.

While the forecasts move in the correct direction, the acid test is whether they can be achieved. To begin with, GDP growth is estimated at 0.5% for 2016, rising moderately to 2.2% by 2019. It is important that this growth base be estimated as accurately as possible as it influences a wide number of key financial stability ratios. For instance, the budget deficit for 2017-18 is penciled in at 3.1% of GDP, thereafter falling progressively to 2.6% in the 2019-20 fiscal year.

If growth in any of these periods were to be lower, the forecasts would, in tandem, also deteriorate, unless accompanied by changes in taxes (increases) and/or expenditure (cuts).

Interestingly, a trend has been established where the early part of these medium-term fiscal ratios are penciled in weaker, but the latter part of these rolling three-year projections have an overly optimistic bias. This trend has contributed to the fiscal slippage that concerns market participants.

What investors would like to have heard more of was that an axe was being taken to failing state-owned enterprises (SOE), that political ideology was being put aside, and that there was, indeed, a sustainable plan to work with private enterprise.

While the minister has more recently brokered détente between the government and the private sector, which successfully averted a rating downgrade, the questions asked are whether this could be sustained if he were not to remain in his portfolio, and also why the public-private partnership vehicle is not being used more aggressively to promote higher levels of growth.

SA may not be as far away from a debt trap as many would believe, especially if the analyses of rating agencies are anything to go by. Less than a year ago Fitch estimated that government debt was 51% of GDP. It further estimated that contingent loan liabilities covering the SOEs were another 11.5% of GDP, of which Eskom had drawn down some 5.5%.

The magic number to focus on is 60% of GDP. Anything higher suggests a country not only being in a debt trap, but having to issue additional debt to service interest payments on existing debt.

As political risk rises, the premium added to the cost of raising capital also rises. Higher costs in servicing debt crowd out other areas where funds could be used more productively, such as welfare and dependency grants, the recipients of which number more than 17.5-million South Africans. The connection between these recipients and an unemployment rate of 26.5% — globally one of the highest — is an obvious one.

While it may sound like the remix of a familiar tune, the focus shifts quickly to what the major rating agencies make of the budget, and whether enough has been done to avert a dreaded split credit rating. Policymakers have probably not done enough to check the challenges SOEs pose to the economy. The same can be said of labour legislation. Sometimes the best efforts are simply not good enough. It is not from lack of trying, but because the fiscal outcomes in the next three years will be dictated by policy shortcomings in other areas of the economy that need to be rectified.

Another event to focus on will be the South African Reserve Bank’s next monetary policy committee meeting between March 28 and 30, and whether it will prepare the economy for some monetary easing. While it will be keen to preserve its inflation-fighting credentials, it will not be insensitive to the mediocre pace at which the economy grew in 2016, or the lethargic — yet positive — pace at which it will grow over the coming three years.

• Garrow is an independent economist