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Finance minister Pravin Gordhan’s medium-term budget on 26 October will come under intense scrutiny for evidence that the Treasury’s solid track record of sticking to strict spending and debt targets will hold up in the face of perceived attempts to erode the integrity of the country’s most respected institutions.
Few doubt that Gordhan – who has stood firm against blatant attempts by political opponents to undermine his authority and force him to step down – will depart from the fiscal discipline that over the past two decades has enabled South Africa to win global financial credibility and investment-grade credit ratings.
Analysts believe that the Treasury will unveil plans to show that the budget deficit will dip below 3% of gross domestic product (GDP) – a key level – over the coming three years, although it may take longer than predicted in the National Budget in February. It is also taken as a given that government debt will stay below the precarious level of 50% of GDP.
Through re-prioritising spending, the Treasury should also be able to come up with the estimated R2.5bn to R6bn that higher education minister Blade Nzminande has said is necessary to maintain a zero fee increase in 2017 for 70% of the students at universities and other tertiary institutions.
There may be hints at measures which must be taken to raise additional tax revenue over the coming three financial years – 2017/18, 2018/19 and 2019/20, as the slowing economy takes a toll on the income streams needed for state coffers.
The medium-term budget policy statement (MTBPS) is not a forum for announcing new taxes, but Value-Added Tax is likely to go up next year, as it is widely seen as the most efficient way to boost revenue without inflicting pain on the private sector or the country’s poor majority. At 14% it is low by global standards.
Political turmoil
But the real issue, unlikely to be resolved on 26 October, is whether the strategy crafted by Gordhan and his team will hold up against political wrangling within the ANC, which is losing credibility amid growing evidence of corruption, state capture and a significant loss of support at the recent municipal elections.
This concern has been highlighted by all three of the top rating agencies – Standard & Poor’s (S&P), Moody’s and Fitch – since President Jacobs Zuma's shock dismissal of respected finance finister Nhlanhla Nene last December, and his brief replacement by Des van Rooyen, a little-known politician who lacked the experience or background for the post. Zuma was forced to reappoint Gordhan after domestic markets went into turmoil and the rand collapsed, but there is no guarantee that Gordhan will remain in his position during the coming weeks with charges of fraud – widely seen as trumped up – hanging over his head. In the present circumstances, Gordhan’s removal would be seen as a blow to the integrity of the Treasury, and spur immediate credit rating downgrades.
That would substantially raise the government’s cost of borrowing, which will make inroads into the money that would otherwise be spent on infrastructure and social programmes. It would also spark sales of domestic bonds and equities by investors, and send the rand into another tailspin.
According to research from Standard Bank, on the day the National Prosecuting Agency issued a formal summons against Gordhan, there were total outflows of R4.536bn, followed by R4.709bn the following day and R1.773bn the day after that.
Ratings outlook
Konrad Reuss, the sub-Saharan Africa MD for rating agency S&P, warned at a conference in Cape Town on 13 October that the situation in SA was clearly “not business as usual” and it would be a mistake to downplay politics and political tension as just “noise”.
“Here we really have political turmoil and political risk that can undermine structural reforms and the business climate and the investment climate, in a way that presents a serious risk to the South African credit story,” he said.
He pointed out that SA’s strong institutions – be it the judiciary, the Public Protector, the Constitution or the Treasury – have been “extremely strong underpinnings” for an investment grade rating of SA. “Any attempts to undermine these institutions – I think from a ratings perspective we would certainly see that as a negative.”
These were ominous words as S&P has placed SA on the lowest rung of the investment grade ladder – with a negative outlook, which means that there is a good chance the next move will be downwards. Its rival Fitch has also given SA a BBB- rating, though with a stable outlook – and both are due to update their assessments on 2 December.
Moody’s on the other hand, has SA given SA a rating two notches above junk status, though with a negative outlook. It will provide an update on 25 November.
Former finance minister Trevor Manuel held out little hope that SA could avoid “junk status” in comments at a media event on 13 October. “In many respects my sense is that the die is cast,” he said, highlighting that the state’s contingent liabilities – guarantees to state-owned enterprises (SOEs) like Eskom and SAA – on their own were “not a happy side” to the balance sheet.
The contingent liabilities are seen as a major threat to SA’s creditworthiness, and their status will be another closely watched feature of the MTBPS. In February, the Treasury said that guarantees to SOEs stood at R467bn in 2015/16, which ended in March, while total exposure – meaning the amounts which the entities have borrowed against – stood at R258bn.
Last month the Treasury extended another R4.7bn guarantee to SAA, which has clocked up losses of R7.1bn in the last two years alone. Gordhan fought a long and bitter battle to replace the board of SAA to turn the airline around, and ended up with a compromise solution that saw the board replaced but the chair Dudu Myeni, remain.
Excluding Treasury
Some analysts believe that the jury is still out as to whether the Treasury will get the political leeway to restructure the SOEs through streamlining and rationalising the state’s holdings – part of a reform agenda seen as vital to spurring economic growth and boosting investment.
In August the Cabinet announced it was setting up a “Presidential State-Owned Enterprise Co-Ordinating Council” to provide Zuma with oversight on strategic decisions and interventions on SOEs – a move that sparked confusion over the reform process, as it was to have been overseen by the Treasury.
In the same vein, the Treasury was excluded from a ministerial task team set up earlier this month to help Nzimande deal with violent protests at universities and student demands for free university education – which would in total cost the government more than R60bn a year.
Excluding the Treasury from this process would make it more difficult for Gordhan to come up with a long-term strategy to address the problem, which will play a significant role in the country’s budgets over the next few years, says Christie Viljoen, senior economist at KPMG Services in SA.
Nonetheless, some top executives still think that a downgrade to junk status is avoidable, and the medium-term budget will help to avert that outcome. “The narrative that all is lost on the ratings side is not valid from my perspective, though the political noise does not help,” said Colin Coleman, a partner and managing director of Goldman Sachs in South Africa.
“We need continued focus, patience, and movement on structural reform.”
This article originally appeared in the 27 October edition of finweek. Buy and download the magazine here.
