By Prof. Busisiwe Mavuso,
- The Medium-Term Budget Policy Statement will confirm one of reform’s biggest successes: government debt peaked last year and is now falling, after more than a decade of fiscal decline.
- Treasury’s discipline rebuilt credibility with markets and rating agencies, with S&P and Fitch both upgrading South Africa. It held the spending ceiling, sent windfalls to debt reduction and capped the wage bill.
- The proposed fiscal rule will give that discipline a legal anchor, lowering borrowing costs for government and business alike.
- Growth is the missing ingredient, and the best fiscal lever is infrastructure spending that has consistently fallen short. Business stands ready to help get projects built.
The Medium-Term Budget Policy Statement this week will be an opportunity to reflect on another major success in the reform effort: the mending of government finances. At the end of the Zuma administration, South Africa was on a downward path to bankruptcy with spiralling debt, falling tax revenues and state-owned enterprises in permanent need of multi-billion-rand bailouts. But this week, finance minister Enoch Godongwana will be telling the story of a fundamentally different fiscal position: revenue collection that is beating forecasts, falling levels of debt and a government that is spending within its means.
From 2008 until last year, our debt ballooned from under 30% of GDP to about 79%. Lenders grew nervous, interest rates rose and credit rating agencies cut our debt to junk. The increased costs of borrowing affected not only government, but every business operating in South Africa. Businesses also feared a financial catastrophe and cut back on investment.
The repair job since has been remarkable. The figures this week will show that last year was the peak of the debt-to-GDP ratio and that the curve is now on a downward trend. That is the result of strong discipline in how Treasury manages spending across the government, holding the line on unaffordable demands for increased consumption spending, while trying to protect the investment spending that can underpin renewed growth. Treasury has used the medium-term expenditure framework guidelines to impose discipline. Additions to the overall budget are only considered once savings have been found. Revenue that exceeds forecasts can only finance temporary needs or debt reduction, not permanent spending. And compensation budgets are capped, requiring departments to manage staff numbers within them.
That discipline means government stayed within the spending ceiling it set with each budget and directed windfalls to tackle the debt load. The market is convinced – the premium investors demand to hold South African government bonds over international benchmarks has narrowed, in part because of a reduced perception of risk. That saves government money it would otherwise be spending on debt service costs. The stronger rand has also helped reduce the cost of servicing hard-currency debt while reducing the value of the amount outstanding.
This improved discipline is due to get a legislative underpinning. We should get an update this week on the proposed fiscal rule – a clear and strong anchor for government spending that investors and businesses can bank on. It will sharply reduce the risk of a future debt blowout.
The repair job has also been helped by reform of the state-owned enterprises. Eskom is back to being profitable, avoiding the need for constant bailouts beyond the agreed debt management plan. Transnet is gradually improving its financial position, last month reporting an annual profit thanks to one-off sales, though debt guarantees are still a drag on the national position. Bailouts are largely a thing of the past – South African Airways, the Post Office and the SABC remain financial headaches, but not at the level of constant bailouts. The Post Office is in business rescue, positioning to stop draining the fiscus.
This improved scenario led S&P to upgrade South Africa’s credit rating last November and Fitch to do so last June, and I expect to see further upgrades after this week’s figures. Upgrades contribute to a virtuous circle, reducing borrowing costs and allowing government to direct spending to other priorities. All of this is highly positive for the business environment. Corporate borrowing rates are capped by the sovereign’s, so as government’s rating improves and its borrowing costs fall, so do the costs for businesses. That makes it cheaper to invest, triggering another virtuous circle.
The one missing ingredient in this story is growth. With the economy now expected to grow barely above 1% this year, there is little momentum to support improving revenues for the government. The fact that it has beaten revenue forecasts is down to better collection efforts and supportive commodity prices. But all the right ingredients are being gathered to support growth, including the structural reforms implemented in our network industries leading to reliable electricity, cheaper data and improved logistics. Growth is now the major focus of the business-government partnership, and the opportunities are becoming clear. The one fiscal component that can further help is government investment – despite over a trillion rand budgeted, spending has consistently fallen short. Treasury can redouble efforts to support departments and local government to successfully implement infrastructure projects. I have said in the past that business stands ready to help on this.
It will be a good week to reflect on the progress we have made, and my congratulations go to Treasury director-general Duncan Pieterse and his team. There are still important hurdles to overcome, particularly fixing local government’s financial mess and its knock-on effect on the Eskom balance sheet and local service delivery. We are also all focused on turning the opportunities created by reform into real growth. But it certainly helps to be able to do so from a stable fiscal position.
