The last three budget speeches, given by two different finance ministers in the space of a year, have delivered sharply different messages. If they were plotted on a graph, it would look like a pyramid.
The first point on the pyramid was the medium-term budget statement in October 2017, delivered by Malusi Gigaba. It was shock therapy. Gigaba, it was said, was the fall guy, haplessly announcing that the government was in serious financial trouble.
Debt was set to grow to record levels in the democratic era. The country was swiftly downgraded to junk by two ratings agencies in the wake of Gigaba’s speech. It piled pressure on the Zuma government for its fiscal waywardness.
Gigaba also delivered the budget speech in February, and took the country to the peak of the pyramid. It had a tone of optimism. While debt was substantial, there was a sense of being on the front foot, buoyed by the President Cyril Ramaphosa-induced optimism of the first quarter. Debt requirements were revised downwards, reaching a maximum in three years and a promise of improvement after that.
But new finance minister Tito Mboweni’s speech last week took SA most of the way back to the impact of Gigaba’s bad news. SA is in trouble, and it is worse than we thought six months ago. Between Gigaba and Mboweni’s speeches, the economic outlook has turned sharply worse, with the country in recession.
Mboweni made it clear that the government has been unable to consolidate expenditure and must now borrow more than previously thought. In the next two years the government will borrow R48.7bn more than it thought it would in February.
The impact is clear to see in the Treasury’s bond yields — an indication of what the government will have to pay to issue all that debt. After Gigaba’s October speech, yields on the benchmark R186 spiked dramatically, reaching 9.47% by mid-November 2017. The election of Ramaphosa as ANC leader marked a recovery, accelerated by Gigaba’s February speech. By the end of March 2018, the yield was at a four-year-low of 7.86%.
Things have backtracked since though, with yields back up to 9.38%, after spiking last Wednesday after Mboweni’s speech from 9.15%. The difference between the March low and current level makes a big impact in the cost of newly-issued debt. The R230bn of gross debt will have to be issued in 2019 will now incur R3bn of additional interest that will have to paid every year.
That is a lot of money that could instead be spent on service delivery and infrastructure.
The pledges won’t move expectations of weak economic growth. But what mattered more than the numbers was the spectacle of Ramaphosa, flanked by economic development minister Ebrahim Patel, sharing a stage with big business heavy hitters.
So it is crucial that Ramaphosa finds a way to get the country back on the front foot. The recession has severely damaged SA’s ability to attract funding at a time when it desperately needs it. He lacks the political space to rein in the cost of the government. The space he has available is to try and turn the private sector into an ally.
Hence last Friday’s investment conference. It was primarily about Ramaphosa using his political space. The pledges made were largely optics. Anglo American’s R71.5bn, for example, which made up more than half the R134bn pledged, was clearly part of its existing capital expenditure plan. The group had already budgeted capital expenditure of $2.4bn to $2.6bn for 2018
The pledges won’t move expectations of weak economic growth. But what mattered more than the numbers was the spectacle of Ramaphosa, flanked by economic development minister Ebrahim Patel, sharing a stage with big business heavy hitters.
Business people were elated to be given the space. Casting the issue as one of investment has allowed Ramaphosa to use the conference to enhance his political standing as the man who can get the money flowing.
What’s less said is that for the investment flows to be sustainable, and to actually make a difference to the economy, Ramaphosa has to make fundamental changes to the policy environment and the government’s financial management, including the costs of the civil service and state-owned enterprises. That uncomfortable subtext will only come to the fore after 2019’s national election.
The conference was also a masterstroke in demonstrating the irrelevance of several political leaders. Deputy President David Mabuza had taken a few days sick leave. Was he back in Russia, many wondered, where he’d been treated in 2015 for an alleged poisoning and was allegedly flown there on a Gupta jet?
Other ministers were at the conference, including Malusi Gigaba and Bathabile Dlamini, who must have felt like yesterday’s people. As Ramaphosa starts forging a genuine compact between business and the government, with labour given a clear oar in the water too, those political actors will increasingly lose traction and relevance.
The Mboweni speech and the investment conference spectacle could not have been further apart in terms of sentiment impact, but both served a clear political purpose. The path we have been on has got us into trouble. We urgently need to forge a new one, and the outlines of that path became evident on Friday.
While Ramaphosa has had six difficult months after the honeymoon period of his presidency, Friday gave him a slight shift in trajectory. If he is able to consolidate that shift and use it to strengthen his political power to deliver genuine economic reforms, the next point on the pyramid graph may be a new peak.
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