Standard Bank economist Goolam Ballim estimates that Finance Minister Pravin Gordhan has a yearly funding gap of between R30-billion and R50-billion to close through a combination of expenditure cuts and tax hikes in his upcoming Budget in order to stave off a mid-year credit-rating downgrade to junk.
Speaking at the release of the bank’s 2016 economic forecasts in Johannesburg, Ballim argued that South Africa faced a “date with destiny” on February 24, when the 2016 Budget would be released, arguing that a downgrade would have devastating long-term consequences for an already flailing economy.
The bank’s view was that Gordhan, with buy-in from both his government colleagues and the private sector, would demonstrate the “fiscal rectitude” required to avoid a June downgrade. This, despite an “acute slippage” in South Africa’s institutional standing, following the removal of Nhlanhla Nene as Finance Minister in December, as well as the serial worsening in South Africa’s gross domestic product (GDP) growth and inflation outlook.
Standard Bank itself lowered its growth forecast for 2016 to 0.8%, which was only slightly below the South African Reserve Bank’s downward revision to 0.9%, from 1.5% previously.
However, Ballim’s analysis that South Africa would stave off a downgrade was premised on there being no further fiscal slippage in the upcoming Budget, as measured by the debt-to-GDP ratio remaining below 50% and limiting the fiscal deficit to 3% by the outer year of the three-year Budget framework.
“In short, we think that the Minister of Finance is looking for a minimum annual average of R30-billion over the next three years to present the rudiments of fiscal probity, but rising up to R50-billion per year to present a more stable fiscal projection.”
The funding gap had arisen in light of fiscal demands that had surfaced since the October mini-Budget in the form of higher funding costs, amid a rise in yields on government debt, higher university education costs in light of the ‘Fees Must Fall’ settlement and the higher public sector wage bill, which was linked to rising inflation.
EXPENDITURE CUTS & TAX HIKES
To achieve fiscal balance would require “rigorous efforts” to restrain expenditure, including curtailing the fast-rising wage bill by reducing the government headcount through natural attrition. In addition, Gordhan could well announce cuts in provincial distributions, as well as plans for limiting the fiscal risks associated with guarantees to State-owned companies.
Gordhan was also likely, however, to seek a “pact with society”, whereby part of the funding gap was closed through increased taxes.
The “accord” would be premised on a higher tax burden, or what Ballim dubbed as "bridging finance", that averts a downgrade and “allows us to pass through that eye of the needle first, [while embarking on] a medium- to longer-term growth journey of recalibrating our political economy, our macro foundations and layering it with a more substantive growth-oriented path.”
To reach such a compact, Ballim was placing much store, though, in a “tectonic shift” in the relations between government and the private sector.
Pointing to recent meetings between business leaders and Gordhan, as well as President Jacob Zuma, he argued that “sufficient consensus” was being built on what was required to avoid a downgrade and to craft a growth path “beyond the rhetorical reference to programmes such as the National Development Plan”.
Zuma met with business leaders in Cape Town on February 9, where he said, “we are turning the corner” in our communication and cooperation between government and business.
“We have to start working together,” Zuma told business leaders, describing the crisis as a “wonderful opportunity for us to work more closely together”.
“We may not be in a position to change the past. However, we have the power to map the future.”
Various government-business work streams had already been established to ensure that a downgrade was averted and Ballim argued that avoiding a downgrade in June would minimise the likelihood of a downgrade in December, unless there were major changes to external factors, such as a slip in China’s growth performance and a further weakening in commodity prices.
“Should we fail on February 24 then a downgrade to a sub-investment grade in June will be a certainty. However, if we do enough in February it signals that an inflection point has been reached and a new course is being chartered,” Ballim asserted.