LUKANYO MNYANDA: Will Godongwana stand fast despite political demands?

Finance minister Enoch Godongwana’s first medium-term budget policy statement was boring enough. In SA’s case this is good, pointing to how he skilfully guided the market in the three months after taking office. He has been consistent and disciplined in his messaging.

It is hard to know whether, when he wrote an article for Business Day in late-July, Godongwana knew that just more than a month later he would be appointed finance minister, the standout announcement in President Cyril Ramaphosa’s cabinet reshuffle. Perhaps he was indeed speaking out of conviction, because the message has hardly changed — he was singing the same tune on Thursday.

Godongwana went out of his way to challenge the narrative that a boom in revenue from an unexpected surge in commodity prices means the government is swimming in extra money and can therefore commit to new and permanent spending on new projects such as a basic income grant.

Yes, the deficit and debt look decidedly better than they did before, but that is only compared with the worst-case scenarios that were being created by analysts due to the Covid-19 outbreak, and the lockdowns that closed down virtually the whole economy.

A debt-to-GDP ratio of about 80% looks good in the context of Ramaphosa’s economic advisory council recommending that it should be allowed to go to 100%, and describing as too ambitious the pace of debt reduction proposed by the team under Godongwana’s predecessor Tito Mboweni that then foresaw the ratio peaking at about 87% in 2023/2024.

Now, in forecasts that are broadly seen as credible due to their modest growth forecasts, the Treasury sees the debt-to-GDP ratio stabilising at 77.8% in 2024/2025. But context is important. Here one is talking about elevated numbers that are out of tune with the norm even in peer economies, which do not enjoy the same privileges of their developed-country peers, which can print cash with abandon and still pay historically low interest rates.

It is also hard to imagine that if a state-owned enterprise is on the verge of collapse next year Godongwana will be able to simply shrug and say ‘Sorry, there’s no money’

In a blog published in 2021, IMF officials noted how public debt had risen “significantly” among emerging markets in the wake of the Covid-19 outbreak and resulting economic stress, reaching 59% of GDP on average. Well, SA was running above that even before the pandemic hit.

In 2019, when it was flirting with losing its last remaining investment-grade rating, that ratio was at 62%, according to Stats SA. It might seem a lifetime ago, but it is always worth pointing out that when Trevor Manuel presented his last budget as finance minister the ratio was just 23%. It is almost inconceivable now that he was bragging about having acted “boldly and decisively” to bring it down from 48% in 1996.

So it is curious to hear people saying SA does not have a debt problem and that it can increase borrowing indefinitely with no consequences. Even with support from the Reserve Bank, which cut the repo rate to a record low 3.5% in July 2020 and has kept it there ever since, SA is still paying a hefty premium to borrow in capital markets.

The yield on the country’s 10-year bond was at 9.4% at the end of last week, not far from a recent peak of about 9.7%. Again, not as bad as the levels in the aftermath of the Covid-19 outbreak and market turmoil that saw the central bank intervene in the market, but it still translates to a lot of the nation’s wealth going to bond investors on foreign shores rather than to build schools, run hospitals and feed the hungry in SA.

Nervous investors

And it is about to get even more expensive, with the Treasury having noted that yields in both developed and emerging economies have started to rise due to the pending  reduction of monetary stimulus by rich countries that will place “upward pressure on domestic borrowing costs”.

No wonder investors are a bit nervous about the “watch this space” nature of the message in the medium-term budget policy statement regarding key debates such as the introduction of a basic income grant or the extension of special Covid-19 relief measures. There is political — and moral — pressure that is likely to be too intense for the Treasury to resist.

It is also hard to imagine that if a state-owned enterprise is on the verge of collapse next year Godongwana will be able to simply shrug and say “Sorry, there’s no money”. Mboweni tried that with SAA, and look where that landed him. The Treasury’s declaration that it is not allocating any money for state-owned enterprises probably is not worth the paper it was written on. 

Reserve Bank governor Lesetja Kganyago is shielded from such political considerations, and he might be unable to provide the government with continued support with historically low interest rates for much longer. Economists are divided on whether he will start increasing rates as soon as the end of the next monetary policy committee meeting, which is due on Thursday.

It is hard to get to a firm conclusion based on his most recent public statements. Three weeks ago Kganyago seemed relaxed with the notion that current inflation spikes were temporary. He was not exactly dismissive of the idea that central banks risk being behind the curve, but also made it clear he was not keen on acting “preemptively in a way that brings down the recovery”. The Bank would act with resolve, he said, if the risks materialised. If the policy meeting had been a few days after that I would have bet on no change. But I am not so confident now.

There were a few minutes on Thursday in which Kganyago took over Godongwana’s press conference to preach about the evils of the “thief” that is inflation, which steals from the poor, making an impassioned argument for a lower inflation target, which should involve interest rates being higher than they would have been otherwise.

Which just highlights that the loose ends left by the Treasury could imply risks of it succumbing to political demands later, just as the already high costs of borrowing increase. And that won’t be a good outcome, despite Godongwana having said the right things.