In a discussion about the medium-term budget policy statement (MTBPS) with a large bond investor last week, we lamented the fragility of SA’s fiscal policy framework.
The weaknesses in central government finances — summarised as high borrowing and debt levels — have been well discussed. However, the difficulties in the state more broadly, including in the provinces, municipalities and state-owned enterprises (SOEs), add a frightening “house of cards” dimension to the fiscal outlook.
Finance minister Enoch Godongwana delivered a budget policy statement that tried to walk the fine line between fiscal consolidation and growing expenditure needs. The Treasury tried to maintain fiscal credibility while accommodating difficult political and economic realities. The minister and his team were only partially successful. Unfortunately, the budget has too many “known unknowns” for the path presented to be entirely credible.
For example, the Treasury assumed an implausibly modest increase in the wage bill and only one more year of the social relief of distress grant. No-one really thinks this grant will be rolled back, and pressure is in fact for it to be increased. For the SOEs, the medium-term budget planned for an annual transfer of only R21bn to Eskom. Recent bailout history, and the failure of the Treasury to anticipate them, suggest this is not the last we will see of state support for Eskom, let alone for other SOEs.
Eskom is not the only SOE that will continue to drain the fiscus. The Treasury announced R30bn worth of new transfers to SOEs: R23.7bn for the SA National Roads Agency, R5.8bn for Transnet and R3.6bn for Denel this year. But every year new transfers for SOEs come into the budget. Over the past five years the SABC, Post Office, Denel, Transnet, Sanral, Eskom, Land Bank, Airports Company, SAA and Sasria have come to the state for bailouts. Many of these entities will be back in the budget sooner or later.
In the fiscal risk statement published in the medium-term budget, the Treasury outlines SOE support as a key risk to the fiscal outlook. Unpaid bills and accruals in provincial and local governments also get a mention. These risks are symptomatic of the systemic nature of the problems bedevilling the fiscus. The factors that put pressure on finances at national government also negatively affect SOEs and municipalities.
For example, low growth has predictably harmed national government and the finances of municipalities and SOEs. Poor governance has led to systemic deterioration in all spheres of government. Failure to decisively address historic inequalities has entrenched lopsided payment patterns for services and taxes. This low tax base undermines the financial sustainability of national government, municipalities and SOEs.
Financial problems in the state sector move across spheres and entities. For example, unpaid bills by municipalities have further weakened Eskom, and failing municipalities pose a risk to the Development Bank of Southern Africa, a lender to the sector. The system’s negative feedback loops lead to growing financial demands on central government when it is at its weakest. This slow-moving doom loop is not reflected in obvious metrics like the debt-to-GDP ratio, but is obvious if one looks at multiple agencies in the state simultaneously.
Because national government, municipalities and SOEs borrow from the same investors, bond holders are aware of the destructive systemic dynamic that is at play in SA’s economy and evident in government accounts. This is reflected in high state borrowing costs and will increase the requirement for government guarantees when SOEs and possibly municipalities borrow in future.
Delays in implementing growth-enhancing reforms and a failure to reimagine a more equitable socio-economy risks entrenching SA in a low-growth equilibrium for generations. Godongwana and the National Treasury team do what they can, but their efforts only mask the wider malaise.
The medium-term budget statement delivered last week was reflective of a Treasury that is trying its best to reverse negative fundamental trends. However, that fiscal outlook was not reflective of the far worse reality.
• Lijane works in fixed-income sales and strategy at Absa Corporate & Investment Banking.
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