It’s another sign of the unprecedented nature of the Covid-19 world that the leaking of the budget — and the finance minister commenting about it on Twitter four days before its official unveiling — can pass without attracting much controversy.
Perhaps it helps that Tito Mboweni’s faux pas happened on a weekend so when bond markets open on Monday none will be able to say that their competitors got an unfair advantage and an opportunity to profit from information that wasn’t widely available.
As we tend to celebrate the fact we have a finance minister who’s somewhat of a maverick, we probably then should also embrace the episodes of unprofessionalism that might come with that. It wasn’t at the same level as his decision in April to grant a private hearing to Goldman Sachs, whom he previously worked for as an adviser, on the country’s Covid-19 response.
Investors who had a peek at Mboweni’s upcoming budget will have noted the lack of any sign of consolidation into the near future.
And as bad as the numbers were, they could hardly be described as shocking in relation to market expectations. When it comes to forecasting, the Treasury is almost always behind the curve, so when their numbers come out, they are usually nothing more than a confirmation of what we would have got from others such as the Reserve Bank and ratings agencies.
The central bank’s forecast of a 7% contraction in GDP for 2020 was widely seen by private sector economists to be on the optimistic side, making it unlikely any of them will be shocked by the Treasury predicting a budget deficit of 14% for 2020/2021. We will know soon enough if the bond market will be so sanguine about the extra supply of bonds this implies.
Those who were present when Trevor Manuel presented his last budget in 2009 would have laughed off anyone who predicted that in two decades SA’s debt would balloon to more than its GDP. From the 23% Manuel forecast about a decade ago, it will, according to the latest budget, reach a huge 113.8% by 2028/2029.
“Reducing the budget deficit was neither easy nor popular,” Manuel said at the time. “But it was the right thing to do, and the outcome is that, year by year, the burden of debt service costs has declined and resources have been released to spend on education, health care, housing and infrastructure.”
What are the chances we will hear such a speech from a finance minister in the next few years? The leaked projections show there isn’t much of a hurry to get there. So what is to be done, as my university friend who was fond of quoting the former Soviet leader Vladimir Lenin, would ask whenever a challenging situation presented itself?
We can perhaps start with what shouldn’t be done.
Among the top on that list should be something about how throwing away yet more money on SAA is not a good idea. One would also hope that talk of investing in nuclear power will remain just that, and other proposed vanity projects such as a state bank and pharmaceutical company will also fall by the wayside.
And the rest isn’t that difficult to work out. One can even look back to a different era when a debt-to-GDP ratio of just under 50% two years into the democratic era was considered to be a crisis and the choices that saw it being halved in the following 13 years.
Of course, there are people who see no reason for decisions that are “neither easy nor popular”. The idea that deficits don’t matter, a line that seemed ludicrous when taken by George W Bush’s administration in the US about two decades ago as it squandered Bill Clinton’s surpluses, is almost becoming mainstream.
In any case, they argue, there are cost-free steps, and the amazing thing is that Mboweni and Reserve Bank governor Lesetja Kganyago are too stubborn to take them. And they probably would have been heartened to read the Financial Times speaking favourably about emerging markets embarking on the sort of money printing that has been seen in developed markets. Unfortunately the headline “emerging markets can use quantitative easing, too” didn’t tell the full story.
For a start, it wasn’t clear how many of these countries had embarked on “proper QE” — another Financial Times story that cited SA among the list of countries that have chosen this policy path, though the Bank has consistently argued it isn’t doing so — or normal money-market operations to ease liquidity conditions.
The apparent endorsement also came with warnings about the capital flight, currency depreciation and runaway inflation that would surely follow if central banks lost their credibility. It also argued that QE should be a last resort and did not recommend it for lower-rated countries with unsustainable budget deficits. The last description seems to fit SA perfectly.
That’s not very different to the arguments put across by Kganyago to Wits University on Thursday where he argued against the use of central bank money printing in an attempt to compensate for problems with fiscal sustainability.
Investors who had a peek at Mboweni’s upcoming budget will have noted the lack of any sign of consolidation into the near future. Add a large and potentially indefinite QE programme to fund the government, then it doesn’t point to a happy ending.
Having likened the deficit to a hippopotamus mouth and talking of the country’s “Herculean task” to close it, Mboweni has another couple of days to come up with a final plan. As always, the problem is going to be the credibility the market assigns to its implementation, and political support from President Cyril Ramaphosa.
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