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Azar Jammine unpacks #Budget2016 – right talk, now let’s see the walk

Straight-shooting chief economist at Econometrix, Azar Jammine, believes Finance Minister Pravin Gordhan made all the right noises in Budget 2016, even surpassing his own expectations. Also, Jammine suggests we shouldn’t pay too much attention to Mr Market’s disappointment – but cautions that a credibility gap remains. Until there is hard evidence that Government is no longer treating business as “the enemy”, the private sector will remain sceptical. It’s a good start, but the trust which was shattered during Nenegate in December will not be re-established without evidence of actual delivery. – Alec Hogg

This special podcast is brought to you by BrightRock and Dr Azar Jammine, the chief economist of Econometrix is with Alec Hogg. Well, just a couple of hours after Pravin Gordhan has sat down, your immediate reaction Azar?

My immediate reaction was quite favourable thinking that Pravin Gordhan had done everything that the business community and the investor public had anticipated or wanted to hear him say. In fact, it was to some extent even slightly better in the sense that he managed to eke out a reduction in the budget deficits for the next three years compared with what people had been anticipating and compared with what had been the case at the time of the medium-term budget policy statement and over and above that he avoided having to raise taxes quite as steeply as many had anticipated. How he did this juggling act is quite impressive and in the process he also addressed the whole closed question of partial privatisation of SOE’s although he avoided even mentioned here.

Yes, he said don’t use the ‘P’ word please.

Don’t use the ‘P’ word if there’s trouble, Pravin but essentially government is thinking about privatising some of the operations and on top of that he also went out of his way to avoid raising the rate of VAT that might raise the ire of the trade unions. He went out of his way to avoid upsetting the trade unions.

Read also: Wikus Furstenberg: Pravin must show business he’ll walk his talk

It all looks pretty impressive but the whole budget was supposed to avoid a downgrading and the market’s reaction has been rather telling, the Rand losing from about R15.30 to R15.70 and then bonds also experiencing a small setback there, twenty basis points. Is that telling us something Azar?

Yes this is telling us, I personally prior to the budget told and wrote to my clients saying, people are being woefully overoptimistic about what can be achieved by this budget but in fact, what has turned out to be the case is precisely that the markets ran ahead of themselves. I don’t why, thinking I don’t know what they were hoping for in terms of this coming out stronger than or more favourable than anticipated. There wasn’t much more that Pravin Gordhan could do and instead what we’re now seeing is a reaction from excessive exuberance both on the bond market and the currency markets that was exaggerated. I don’t know what else Pravin Gordhan could have done to please the market. The damage was done long before and all that Pravin was capable of doing was a bit of damage control.

By damage, are you referring to what happened in December?

Exactly, that really set the cat among the pigeons. It destroyed an extra half to one percent of our economic growth prospects because it meant that inflation will turn out to be higher than previously anticipated and that meant interest rates would also rise by more than anticipated.

That’s also something that the rated agencies are looking at. They need to see fiscal discipline which seems now to have been restored but they also want to see economic growth. Where is that going to come from?

That is precisely why they are also possibly marking us down. Essentially they want to see implementation of the National Development Plan but there is nothing here to suggest that we will see more a successful implementation of the tenets of the National Development Plan than before but at the same time one must recognise that if Gordhan had gone the full hog and tried to please the market in exactly the way that the markets had hoped, he would have raised the ire of the trade unions and we would have had much social unrest which ultimately could have done more damage than is the case right now.

Read also: Pravin’s Pledge: I’ll defend SA credit rating – we cannot afford to lose it

Its still tight rope that’s being walked here.

It’s a very tight rope that’s being walked and we must be very grateful that we have someone who has managed to restore an element of credibility back in the government. On the face of it, it’s crazy that the markets would have marked us down given the fact that the budget deficits for the next three years have been reduced compared with previously but the markets have also realised that there’s been a bit of a trick here and that is the big public sector wage agreement that was reached last year was financed virtually entirely out of a fairly sizeable contingency reserve that was set aside.

This time round the contingency reserve is very small, implying that the government has not replenished it and has simply not been able to reduce public service remuneration all that much. It says it’s going to try and freeze employment in the public sector and there’s going to be all these other cutbacks on small things such as overseas travel, dinners and that sort of thing but I think the market will want to see that being put into place before it becomes overly optimistic.

There’s quite a big swing towards higher education, certainly R16bn is nothing to sneeze at and I asked in the question time, where this was going to be coming from and there was a bit of a convoluted answer about, well there wouldn’t be further, or there would freeze on new employment and it’s actually going to come out of the public sector wage bill. How realistic is that given that you’ve just mentions the unions a few times in the conversation already?

I think you’re hitting at the very heart of the scepticism that prevails as a result of this budget and that is that people are saying it’s all very well talking about reprioritisation of expenditure and cutting back on wastage and cutting out corruption but we want to see the action and in the absence of hard evidence about that we’re going to maintain our scepticism and argue, well, you say you’re going to spend more on education, which I’m sure you will but then are you really going to get the cutbacks in other forms of expenditure that you’ve alluded to and if you don’t that means that you will miss the deficit reduction targets.

Azar what about the partnership with business? Again Pravin made a lot of play of this both in the press conference that we had in lockup and in the budget itself. He was praising business. He was saying that there are going to be perhaps opening up of that R500bn in cash that is sitting in balance sheets in bank accounts of corporate South Africa. Is there enough in this, is there enough being done among your clients to actually turn on the taps?

I don’t know how many businessmen were involved in the talks with government. Probably relatively few and it’s all very well to say that there’s going to buy-in and increased trust between the two. Again, there’s going to be a lot of scepticism. Let’s see the action and let’s see whether government really does stop treating business as the enemy and before we see that in place, I think there’s going to remain a lot of scepticism.

We’ve had too many cry wolf situations where government has said it’s going to cut back on spending, it’s going to cooperate more with business and in practice that has never been the case and part of the reason is, it’s in alliance with the trade unions and it knows that it has to keep looking over its left shoulder all the time and so long as that is the case, there remains scepticism as to whether we will see the kind of investor-friendly and business-friendly policies that are needed to reverse the downward trend in our economic growth trajectory.

Yes and then to stave off the downgrading from the ratings agencies. What about the moves on state-owned enterprises? Surely the fact that business will be encouraged to take at least minority shares there and to co-fund certain projects has to be positive in that regard.

I would have thought that was a very positive move and that’s precisely why I suggested earlier in this interview that I thought that Pravin had done everything that the business community could have expected him to do in this regard. He went even further to talk about SAA selling a minority stake in that. That does show some attempt at structural reform but there’s clearly a lot of scepticism as to whether the trade unions will allow that to happen, especially in light of the way in which the government backtracked on its pension fund reforms last week.

Something that was hidden on page 57 of the book that we were given was the amount of money that’s going to go into the new BRICS Development Bank. He did say in the speech there’d be R2bn. or R2bn. was spent there already or had been invested there. It’s going to be R11bn. over the next three years. If you consider in the context of having a development bank of South Africa that is apparently putting something like R46bn. into developments over a similar period, why do we need two similar institutions and is this more than merely a political commitment?

To some extent it’s a bit of both. It is a political commitment and it’s an attempt, I suppose at putting money into this big bank so that we can access it at some stage, access a lot of Chinese money especially, and some Indian and Russian money in the future over and above what the development bank is managing to raise?

Is that realistic?

I think so and in the broader scheme of things it’s not a huge amount of money over a three-year period. We’re talking about R3bn. or R4bn. a year. That’s not huge and the Chinese by contrast are putting in hundreds of billions of Rands into this bank and South Africa hopes that it may be able to gain some leverage literally and figuratively from such a bank in the future.

Azar, you’ve given us both sides of the coin. If you were to sum everything up, would you say that this was better than anticipated, this budget or did he not go far enough?

I believe that he did go every bit as far as I could ever have hoped he would go. The one thing he did do was also which I think people have lost sight of, is he refrained from coming down too hard on the consumer through enormous tax increases and for that we need to be grateful because in the short to medium term the adverse impact on economic growth will be less severe than one had previously feared and he’s done that without necessarily damaging the longer-term growth trajectory in any way compared with what we were looking at previously as well. I would have thought it was a job reasonably well done. I didn’t expect that it would solve all our problems and it hasn’t but in the context of the pincer movement between low growth on the one and the need to sustain fiscal discipline, it’s about as best as one could have hoped for.

What about SARS? One of the first questions in the press conference in lockup was why is Tom Moyane from SARS not here? Clearly there’s some pretty heavy tension going on.

There is some tension going on there, one fears, and there is concern that the stability of SARS might be at stake. I think though one needs to wait to see what actually transpires. I don’t have enough of an insight into this whole issue to draw a definitive conclusion but clearly some people might be concerned about it because SARS is one of the three bastions of stability in the macro economy. The other two being National Treasury itself and the South African Reserve Bank and Pravin Gordhan himself alluded to the sound way in which SARS is still managing to collect taxes. If there are shenanigans going on in SARS, that is of major concern but I do not have enough information to be able to draw any definitive conclusions at this stage.

Read also: Donwald Pressly on SARS: In the battle with Gordhan, Moyane must go

Dring his previous term as finance minister, Pravin Gordhan progressively worked towards getting a Procurement Tzar placed. He now has this person there. He’s made further moves in this direction and it’s probably all caught up in the detail but it did appear, given that the procurement or the chief procurement officer has to cut R25bn a year off a R500bn a year project by just eliminating waste that could be a move in the right direction.

I do believe it is and therein lays a lot of the rub with regard to this budget. If that person is successful, it may go quite some way towards enabling government to achieve the savings that are needed to be able to fund for example more spending on higher education and the like but it’s a wait and see and if there’s one conclusion that I had drawn in my own mind about the likelihood of a credit ratings downgrade is, I would think that although this budget may not have staved off the possibility of a decline to junk status, what it may well have done is to simply delay that event until the end of the year rather than the middle of the year because that will provide the ratings agencies with sufficient time to decide whether or not government has been true to its word in implementing the tenets of this budget.

The big question amongst many people was did Pravin Gordhan possess the political capital? Did he have the political support to be able to do unpopular things? What’s your view on that having seen what he’s tabled?

Clearly the one area where he may have done something slightly unpopular is talking about selling off state-owned assets but one must also be realistic that this is a local government election here and even if he did have the political capital he would have refrained from coming down too harshly on the economy. It would have been naïve to think that he would really hammer the daylights out of the economy simply in order to please international investors.Read also: Paul Whelan: 2016 elections – Zuma’s tipping point? Succession concerns.

Things might have been different if it wasn’t an election year.

Things may have been different if it wasn’t an election year. The classic example and I often thought that this might be the litmus test was an increase or not in VAT and he clearly refrained heightening that and resorted to other forms of tax increases but even there he didn’t come down terribly hard even on personal tax in the way that people anticipated, but as I say, he has somewhat and the Treasury has played around with this contingency reserve and that’s hidden behind the scenes and it’s managed to get away with murder in Some respects by playing around with these numbers.

It’s quite extraordinary to see how the contingency reserve has been trimmed back by some R44bn. for the next three years compared with what was the case a year ago and clearly the elephant in the room was the huge public sector wage increase that was announced over and above the budget last year and that is of course, what is creating a lot of the scepticism now. Also in February 2015 people said it’s a fairly conservative, favourable budget and then a few months later you had a public sector wage agreement that basically blew the budget out completely. People are going to wait to see what happens from now on. In other words, what I’m saying is, it’s not enough just to look at the budget. You have to look at the actions after the budget in the ensuing months.

One good thing to end with from the budget generally, one good, one bad, what was the thing that surprised you on the upside?

What surprised me was the extent to which he was able to bring down the budget deficit and the extent to which he was able to refrain from increasing taxes to the extent that one might have feared, which in turn means that the negative impact on the overall economy is not going to be quite as severe. On the negative front I can’t draw that from the budget itself but the fact is that it hasn’t removed scepticism regarding government’s ability to come down harshly on its expenditure and the waste and irregular expenditure that has characterised its history in the last few years.

Azar Jammine is the chief economist at Econometrix and this special podcast was brought to you by BrightRock.

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