Finance After the Budget Speech: An outlook for South Africa’s economy

After the Budget Speech: An outlook for South Africa’s economy

Tito Mbowani set out South Africa’s budget proposal on 26 February. At that time, the world was just getting to grips with COVID-19 virus; since then, the world’s economy has been in freefall. Amid all that is happening, as we go live with Property Review, we still need to remember the budget and what it requires us to do as we go through the lockdown and come out on the other side

By Mark Pettipher

Following the Budget Speech, SAPOA Western Cape hosted a Post-Budget Breakfast sponsored by Growthpoint Properties at the beginning of March, where Brian Kantor took us through parts of the speech and outlined that South Africa’s economy is in dire straits.

Later that month I travelled to Mbombela to attend another Post-Budget Breakfast, this time sponsored by Halls Properties, Nedbank and WDT Attorneys. Here the keynote speaker was Nedbank Chief Economist Nicky Weimar.

The two speakers could have been reading off the same “song sheet” when it comes to the way they described the state

Since 2012, we’ve been sliding downwards.

of South Africa’s economy. They spoke about how things were relatively okay from an economic growth perspective up until 2008. The GDP graph shows us that as Jacob Zuma took over the presidency in May 2009, the economy took a tremendous hit, down to 0.5%. There was a modest period of growth around 2014 at an average of 2.8%, but since then the economy has continued –as Weimar put it – a slow, steady decline to 0.9%.

“What can the future bring us, and where will the growth come from? Can government drive growth and job creation? The short answer is no – because they are out of money,” said Weimar. “They have been running budget deficits of more than three percent of GDP for more than a decade, and have estimated that they will be running at less than -4% this year. What this means is that they have been running a shortfall, and have to borrow more to finance a consistent shortfall. Government debt, which used to be 30%, will rise to just short of 60% in 2022. If you add the debt of state-owned enterprises, the government is actually closer to 80%. The danger is that they have to borrow more money just to pay the debt.

“The government needs to contain and slow this debt accumulation. They can make sure that there is policy certainty to create an environment for the private sector to thrive.”

Weimar predicted that the South African Reserve Bank would cut interest rates. She was proved correct: 100 basis

points was shaved off the base lending rate, taking lending rates to 5.25%. This had a two-fold aim: to try to stimulate the economy, and to help to ease the effects of the current COVID-19 pandemic. Then South Africa went into a 21-day lockdown at midnight on 26 March.

But Weimar and Kantor agree that fixed investment is the key to faster growth and job creation. It’s all about the future. “President Ramaphosa knows this,” said Weimar, “which is why he has started an investment drive of attracting more than a trillion rand and new expansionary investment over the next five years, through annual investment summits.

“The government isn’t in a position to drive growth, and thus is not in a position to accelerate infrastructure spending in any meaningful way. If you want to attract the one-trillion rand, you have to attract private investors and companies that are willing to expand operations. That is what fixed investment is. However, to attract investors, we were told by both Kantor and Weimar, we need to see energy stability in South Africa – and this won’t happen while the nation’s energy provider is struggling to keep the lights on.

As reported by Bloomberg, “Eskom has more than R450- billion of debt, isn’t generating enough income to cover its operating costs and has instituted regular power outages as insufficient spending on maintenance leads to plant breakdowns. Eskom’s precarious state stems from years of mismanagement,

a bloated wage bill, massive cost overruns at two new coalfired power stations, and maintenance backlogs at other plants that left it struggling to meet demand. The government has said the utility is too big to fail, and allocated R138-billion over the next three years to enable it to keep operating. Yet that isn’t likely to be enough to ensure its viability.”

We were also told recently, that it will be at least 18 months before we will be clear of rolling blackouts.

Adding to the government’s Eskom problems is the state-run airline SAA, which was to receive a much-needed government bailout to the value of R16.4-billion as announced during Tito Mboweni’s 2020 Budget Speech.

The latest government bailout follows dire financial and operational circumstances that saw the national carrier grounded in late November 2019. To compound the airline’s woes, trade unions embarked on debilitating strike action, which resulted in a serious drop in revenue – at a time when SAA could least afford it.

Shortly before it was placed under business rescue administration, Public Enterprises Minister Pravin Gordhan afforded SAA a brief reprieve in the form of a R2-billion bailout. Gordhan, however, denied that the financial help was to be classed as a bailout, saying, “It must be clear that this is not a bailout. This is the provision of financial assistance to facilitate a radical restructure of the airline.”

Since 2010, the government has ploughed approximately R16.5-billion into the embattled airline. This latest bailout matches that total amount.

Parastatals such as Eskom and SAA need to be restructured and be forced to be more accountable. “The reality is that the president needs to deal with South Africa’s structural issues, which also applies to the country’s municipalities and their management,” said Weimar. “Dealing with economic delinquency comes with painful decisions. In the short term, there is a cost. Restructuring that requires retrenchment and displacement of people is unpopular – and that too is a political cost.

“The government is not able to fix the economy on its own. A solution, therefore, is to open the market to the private sector, which would allow the process to happen indirectly by creating competition, so only the strong and agile survive. The outcome will be the same – there will be labour unrest, and pressure will be put on politicians to change the route.”

Kantor put forward an idea that perhaps the government should issue equity bonds to encourage the private sector to help with the bailout of failing state-owned enterprises. This would lead to governance that would be accountable to shareholders.

Lest we forget, when the lockdown is over, our economy – and the entire world’s will be seriously challenged. The country’s issues will still need to be addressed, cleaned up and put back on a growth trajectory. Out of adversity comes diversity and opportunity: South Africans are, if nothing else, a nation that will rise to the challenge and “make a plan”.

Budget Speech 2020 framework ● Low growth led to an R63.3-billion downward revision to estimates of tax revenue in 2019/2020 relative to the 2019 budget. Debt is not projected to stabilise over the medium term, and debt-service costs now absorb 15.2% of main budget revenue. ● The 2020 Budget proposes a total reduction of R261-billion over the next three years, which includes R160.2-billion reduction to the wage bill of national and provincial departments and national public entities. ● Re-allocations and addition total R111.1-billion over the medium term, of which R60-billion is set aside for Eskom and South African Airways (SAA). ● These measures narrow the consolidated deficit from 6.8% of GDP in 2020/2021 to 5.7% in 2022/2023, with debt rising to 71.6% of GDP over the same period. ● Along with faster economic growth, fiscal sustainability will require targeted reduction of specific programmes, and firm decisions to rein in extra-budgetary pressures, including reform of state-owned companies and the Road Accident Fund.

57 SOUTH AFRICAN PROPERTY REVIEW – APRIL 2020 Health, education, social development and security Finance Minister Tito Mboweni also highlighted that education and health would be treated as a priority. To that effect, the government will increase spending on schools and healthcare. “The largest spending areas will be learning and culture, which receives R396-billion, followed by health with R230- billion, and social development with R310-billion,” he said.

About R212-billion was set aside for economic development, which includes industrialisation and exports, agriculture and rural development, job creation and labour affairs, and science and technology.

Furthermore, R217-billion will go towards peace and security: police services will be granted R106-billion, while the remaining funds will be allocated between defence and state security, as well as law courts, prison and Home Affairs. Debt-service costs and community development