When senior Treasury people, who are not usually given to hyperbole, start publicly talking about those three dreaded letters — IMF — one should get worried.
It should however be made clear that they were not suggesting that there is an imminent danger of SA going with a begging bowl to the International Monetary Fund (IMF) any time soon.
It seemed to have more to do with frustration and resigned acceptance that for some in the ANC alliance nothing short of this will convince them of the need to compromise on policy issues. Appealing to reason and pointing out, for example, that the interest bill being the fastest-growing area of spending is not something we should be proud of because, in simple language, it means more money for bondholders and less for schools and hospitals.
The medium-term budget policy statement (MTBPS) last week gave one enough reason to be depressed, with finance minister Tito Mboweni suggesting a day later, if only tongue in cheek, that divine intervention might be required for the country to avoid a credit downgrade from Moody’s Investors Service. The ratings company seemed to be losing faith even though it still kept SA at investment grade.
The thing that is going to sink us, if we go that way, will be the politics. It should be worrying to the government that even Moody’s looks to be close to throwing in the towel.
Since there was no realistic expectation that a downgrade would come on Friday, the worst that might have happened would have been a move to credit watch, which would have narrowed the window of opportunity to come up with a plan to just three months. It’s probably too early to say if his prayers have been answered.
That Moody's placed so much emphasis on the February budget on determining its next step, while also making it clear that it is not overly optimistic that the government will find the “political capital” needed to implement measures to boost growth and stabilise its finances.
The government was gloomy enough in its own assessment, warning that if things don’t change the debt-to-GDP ratio could reach 81% in 2027/2028. But it’s much worse than that. Including government guarantees to state-owned enterprises, Moody’s sees the ratio approaching 80% of GDP at the end of 2022. And it doesn’t even necessarily see that as a peak.
Back to the IMF. Though things are bad, it’s still a while before SA has to go that route and does have some features that support its resilience, at least for a while, provided that opportunity is taken advantage of.
Three months ago, analysts at Futuregrowth Asset Management posed two questions that needed to be answered to determine whether SA was in danger of becoming another Argentina and go to the IMF, where it will have to accept austerity measures more painful than anything that would get Cosatu to the streets today.
On debt sustainability, the finding was mixed. We could get to a sustainable position if we managed economic growth of about 2.6% a year over five years, and managed to contain spending by R150bn in that period.
The first part won’t happen as the government’s own forecast sees the economy accelerating to just 1.7% by 2022 from an expected 0.5% in 2019. Perhaps in recognition of this, the medium-term policy statement suggested that these savings must be found over the next three, rather than five, years.
“Mercifully,” the analysts wrote at the time, the government had issued “compulsory budget baseline” reductions of 5%-7% in the three years through to 2022/2023, which if — a big if — adhered to would be “an important first step away from the fiscal cliff”.
Another positive factor was the management of the financing of its budget, favouring rand-denominated and longer-dated bonds.
The last point is crucial because it means SA can avoid the roll-over risk that more recently forced the weaker European nations into rescue packages during the region’s sovereign debt crisis, when they found themselves unable to access capital markets and repay debt that was becoming due.
According to latest data from the Treasury, foreigners held 36.9% of the country’s debt at the end of September, while the steady drop to the lowest since January 2017 could be seen as another sign of the country losing favour among foreign investors, we can take comfort in that this is mostly denominated rand, so the value doesn’t shoot up each time there’s a rand slide.
There’s also the free-floating exchange rate which acts as an economic “shock absorber”, while the country has enough foreign exchange reserves to cover more than six months of imports.
But the thing that is going to sink us, if we go that way, will be the politics. It should be worrying to the government that even Moody’s, which has gone further than the other agencies in giving us the benefit of the doubt, looks to be close to throwing in the towel.
On his way back from Japan, one can hope that one of his aides alerted President Cyril Ramaphosa of a YouTube clip of the postgame press conference by Springbok captain Siya Kolisi and coach Rassie Erasmus. He might want to focus on the part where Erasmus talks about hope not being enough and the need to deliver on the field.
It would be good to see some of that from the president. The Boks won’t be there to lift the national mood in three months’ time.
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