Last week I made the point that SA is in much better shape than in 2013, when the “taper tantrum” tore through some vulnerable emerging markets. But after the still red-hot inflation print from the US last Thursday, anyone waiting for a US Federal Reserve pivot to start easing the pressure of rising interest rates would be better advised waiting for an ANC government to cut the ribbon on some newly built infrastructure projects — other than a flush toilet.
That is thanks largely to commodity prices supporting our positive trade balance, which could be even better if not for Transnet’s confidence-shattering incompetence. And the strength of our fiercely independent Reserve Bank.
But we are not yet out of the woods, an entanglement created by a rapid increase in state expenditure that coincided with former president turned ex-con Jacob Zuma and his band of fiscal flesh-eating radical economic transformers.
Harvard economic policy wonk Ricardo Hausmann this week was quick to point out that while SA may be less vulnerable than many other emerging markets, our structural budget deficit and debt profile in a rising interest rate environment should be giving policymakers sleepless nights.
At the long end, with bond yields rising to 11.25%, interest expenditure continues to crowd out spending on fixed investment, which is the only sustainable pathway to growth.
While borrowings should be used for fixed investment, and current expenditure be met with revenue, the purpose of fixed investment is also to yield a return and prove self-financing in the longer term. This is what should be driving finance minister Enoch Godongwana’s thinking as he prepares for his second medium-term budget policy statement (MTBPS).
He’s in luck. Inflation has had some positive effects on the fiscal accounts because in nominal terms we will see the Treasury’s GDP estimates revised upwards, improving the debt-to-GDP ratios. So far Godongwana’s tenure has been marked by strict adherence to fiscal discipline, with budget expenditure sitting at 40% by August 2022 versus just over 41.5% in 2021.
Investec chief economist Annabel Bishop notes that “this year it is also lower than the comparative periods of 2020/2021 and 2019/2020, and the previous two years, as fiscal containment proves a feature of minister Godongwana’s tenure at the helm of the finance ministry”. However, his resolve will be severely tested by the demands of state-owned enterprises (SOEs) and the siren song of a universal basic income.
Transnet is not only asking for roughly R40bn to help acquire new rolling stock, but is under severe pressure from unions to bake in permanently higher salary expenditure without responding with some clever rationalising of the wage bill elsewhere.
Bishop expects an almost 3% improvement in the debt-to-GDP ratio from a projected 72.8% in the February 2022 budget, as nominal GDP rises by up to 9.6% year on year. The three medium-term years of 2023/2024 to 2025/2026 are also improved by the inflationary effect, to close to 70% of GDP as well, versus the original National Treasury projections of 74.4%, 75.1% and 75% of GDP.
This is likely to lead to an improved budget deficit for the current year, which was projected at -6% of GDP, while Investec now expects -5.6% on upward revisions to nominal growth with 2023/2024 at -4.4% and 2024/2025 at -3.9% (previously -4.8% and -4.2%).
But back to those perennially ailing SOEs and their ability to constrain rather than enhance growth. The market expectation is for the MTBPS to outline some of the government’s plans for Eskom’s debt, with market anticipation that the state may absorb at least some of the nearly R400bn. This is a critical enabling component of speeding up the unbundling of Eskom to provide greater clarity to capital markets of the various entities’ (generation, transmission and distribution) balance sheet strength.
Considerable investment is required by the newly formed Independent Transmission System and Market Operator, which will entail borrowing from debt markets, demanding a relatively lightly geared starting point. The implications for the economy, the fiscus and for Eskom of this decision are absolutely enormous.
The question is: should there be performance demands placed on Eskom in light of this, and if so what would they be and how would they be made enforceable? Meanwhile, Transnet must be saved at all costs. Many people don’t understand the severity of where we are. If Eskom fails we flick a switch and see it. When Transnet fails there is no immediate darkness. But jobs are destroyed, the fiscus harmed and the economy severely affected.
There is no more soft pedal capacity. The Transnet strike must stop, and the utility immediately assisted, in many ways by as many players as possible. Otherwise, this could be the straw that breaks the camel’s back. The backbone of our economy — gone.
The private sector has the capital and appetite to invest in fixing our broken railways. The only drag that remains is the political will to do the obvious.
• Avery, a financial journalist and broadcaster, produces BDTV's ‘Business Watch’. Contact him at Badger@businesslive.co.za.
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