No-one should blame finance minister Tito Mboweni for delivering a supplementary budget that’s impossible to swallow; he was in an impossible position and has had to resort to fiscal gymnastics to make the numbers add up.
Except they don’t, not really, and apparent scepticism over his debt stabilisation plan is growing. Quite simply, Mboweni’s plan to get debt to stabilise at 87% of GDP in three years’ time will require such an aggressive fiscal adjustment that it appears neither politically nor economically feasible.
Moody’s Investors Service and Fitch ratings agencies think the plan is unlikely to be achieved, and so do many local economists. More likely is that SA’s debt ratio will keep rising inexorably upward and breach 100% in the next few years.
Whether that tips SA into the sovereign debt crisis Mboweni is warning about depends on whether investors continue to buy SA debt and how much of a risk premium they demand to do so. The more indebted SA becomes, the larger that premium will be, and the less money there will be for the government to channel towards productive investment, never mind wages and social grants — the pillars that prop up its political power. Some municipalities are already reporting that they cannot afford to pay salaries.
There are at least three major problems with Mboweni’s plan. First, powerful trade unions and deep divisions within the governing ANC will make it exceptionally difficult to achieve the huge expenditure cuts required. Though Mboweni says the cabinet backs it, it is unlikely his colleagues realise that they have agreed to the equivalent of a harsh IMF structural adjustment programme.
In any event, SA’s fiscal consolidation efforts over the past five years have largely failed because the government was unable to take the tough decisions required to moderate the wage bill, deny bailouts to delinquent state-owned enterprises (SOEs) or implement pro-growth economic reforms.
If these factors made it impossible for Mboweni to budget for debt stabilisation before the pandemic, how can anyone believe his new plan is credible now? Will this government really be able to slash spending, close SOEs and render thousands of their workers jobless, with unemployment headed above 30% in a country ravaged by Covid-19?
Second, the R230bn in expenditure cuts and R15bn in tax hikes planned over the next two years might, by reducing aggregate demand, weaken any recovery. In short, the extent of austerity required to stabilise the debt ratio has become so huge it could ultimately prove self-defeating.
Third, the budget numbers don’t stand up to scrutiny. For example, it allocates only R40bn for the Covid-19 special grant, though Treasury director-general Dondo Mogajane insists the government will honour the full R50bn commitment made initially. He also insists President Cyril Ramaphosa’s infrastructure drive won’t want for funds, even as the budget slashes infrastructure spending. There is also no plan to plug the revenue holes in the SOEs’ balance sheets created by the lockdown or to restart SAA.
Even more implausible is that Mboweni’s “active” debt stabilisation path allows SA to keep running primary budget deficits for the next two fiscal years while projecting that the debt burden will remain flat at about 82% this year and next.
So why did Mboweni craft a plan that lacks credibility? Why not budget for debt to stabilise at a more realistic 100%?
It seems that to unlock about R100bn from the IMF and other multilateral lenders Mboweni had to demonstrate that the country had a better fiscal plan than that. A 100% debt ratio can hardly be considered sustainable for a country like SA. In fact, 70% is the IMF’s high-risk threshold, the level at which other emerging markets have encountered debt distress.
Any way you look at it, SA is really starting to push its luck. The country’s long-feared fiscal crisis has finally arrived — and it is real. Oh boy, is it real.
• Bisseker is a Financial Mail assistant editor.
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