While analysts and investors are hyperventilating about the removal of Pravin Gordhan as finance minister, it is sometimes difficult for the public to understand the effect of a sharp change in the direction of fiscal policy on each and every person in SA.
It may be easy for some in politics to dismiss the opinions of credit ratings agencies or foreign and local investors. However, irresponsible fiscal policy can quickly lead to less money for social welfare grants and higher prices for the most basic goods and services.
SA’s history offers an excellent lesson in the dangers of unsustainable policy.
The catalyst for the end of apartheid was not an attack of conscience by the National Party — it was the pragmatic realisation that they were running out of options.
After a decade of sluggish growth, the South African state was on the verge of bankruptcy in 1994 — a situation worsened by the large budget deficits the apartheid government incurred in its final years.
Between 1994 and 2000 the Treasury, together with the leadership of the ANC, stabilised the fiscus. A transparent budgeting process that made SA a world leader in macroeconomic management was adopted. The state built credible macroeconomic frameworks and strengthened the institutions responsible for overseeing the economy.
These efforts resulted in repeated credit rating upgrades between 1996 and 2005, leading to lower borrowing costs for the state, companies and individuals. This freed up money for the state to deliver access to basic services such as electricity, water and sanitation for most South Africans, as well as social support, without which too many of them would live in abject poverty.
There is little doubt that macroeconomic stability created the base from which to reap the economic gains of 2000 to 2008. Many of those gains have since been lost.
Without a strong Treasury, the rand could be well north of R20 to the dollar in the not too distant future
In 1994, 25% of government revenue was spent on servicing debt – one out of every four rand the government collected in tax was spent on interest costs. That number bottomed at 6% in 2008. It is now around 10%.
The government spent R1.45-trillion in the current financial year ended March 31. That sounds like a lot of money. However, the bulk was spent on basic education (R226bn), healthcare (R170bn) and social welfare grants (R165bn).
A loss of investor confidence in the government due to the erosion of the Treasury would push up borrowing costs. A sharp rise in borrowing costs would increase the amount spent on interest higher still.
More money spent servicing debt would leave less for basic services including healthcare, education and housing. Service delivery protests will accelerate when budgets for basic services such as sanitation, clinics and security are cut.
This is what happened in Brazil in the late 1980s — when interest costs consumed all the tax raised for a few years. This is what happened in Greece where eventually the government was forced to fire teachers and nurses to service debt costs.
Foreign investors own 38% of South African bonds. A loss of confidence that prompts these investors’ exit would result in both a sell-off in bonds leading to higher interest rates and a much weaker rand. Without a strong Treasury, the rand could be well north of R20 to the dollar in the not too distant future.
SA imports about half of what it consumes, which means currency weakness translates directly into higher prices, especially in food and fuel.
These two items account for a far bigger portion of the purchase basket of poor people than of the better off, and increases would lead to greater challenges for the poor. To sum up: the erosion of the Treasury would eventually lead to higher food prices. It is worth emphasising that we are not claiming that Gordhan is the only person fit to be SA’s finance minister. Rather, it is vital that policy is run in a manner that gives confidence to the people that lend money to the government and that it is run by a person who is well trusted by them.
Given the delicate juncture at which SA finds itself, the changes made at the finance ministry are unnecessary. The poorest in society will be worst hit by such a move.
Instead of playing a local version of Game of Thrones, SA needs leadership that focuses on the reforms necessary to boost growth well beyond the current tepid level of 1% per year.
We need the Department of Mineral Resources to propagate mining policy that encourages investment while protecting workers.
We need the Department of Social Development to ensure the distribution of social welfare grants in a cheap and transparent manner.
We need the Department of Basic Education to distribute textbooks on time. We need the rest of government to do its job – and to do everything required to retain the institutional strength of the Treasury.
• Moola is co-head of SA & Africa Fixed Income at Investec Asset Management and Gobodo is strategy leader of quality capability at Investec Asset Management
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