Trudi Makhaya and Patrick Bond discussed the expectations around the 2017 Medium Term Budget Policy Statement on POWER FM hosted by Ayabonga Cawe.
Listen below:
Category: fiscal policy
My most recent column, headlined Medium-term budget policy statement bucks boring trend, was published on the day the National Prosecuting Authority issued summons to the finance minister to appear in court in November. By mid-morning, it was clear the column had been overtaken by events.
There is doubt that this week’s medium-term budget policy statement will be no ordinary one, but not for the reasons espoused in the column. There I was, going on about the likely content of the policy statement, when the real action was in the criminal justice system. I expected, as always, that when the statement was delivered, we would witness a well-calibrated, stage-managed process rather than fireworks. I also argued for the limits of fiscal policy in the absence of a clear economic vision from the highest levels of government (that is, beginning with the president) and a capable state.
As the case against Finance Minister Pravin Gordhan unfolds, it is worth reflecting on the broader “case” against the Treasury. It is a series of deeply held critiques, mostly from the labour movement and left-leaning academics. Lately, the case has attracted new complainants.
The medium-term budget policy statement has been a boring affair thus far. Sure, there have been moments such as in 2013 when Pravin Gordhan introduced cost-cutting measures in the government, culling lavish lunches, alcohol-fuelled events and business-class travel. But this was hardly earth-shattering stuff. Then there was last year’s statement by the then finance minister Nhlanhla Nene, which saw “fallist” students bring some excitement to Parliament. It served more to overshadow the medium-term budget than to give it prominence.
There is a good reason the medium-term policy statements have been such bland affairs. The government tends to conform to the main budget, with limited adjustments midway. The expenditure ceiling is adhered to. All as it should be.
This year is different. The passage of the medium-term statement is seen as a test for the standing of Gordhan and the Treasury within the government. Gordhan is still in his position. Does this mean he has the political support to do the tough work of allocating resources in a charged environment?
Extracts from S&P statement:
Low GDP growth is putting South Africa’s economic metrics at risk and could eventually weaken the government’s social contract with business and labor.
Rising political tensions are accentuating vulnerabilities in the country’s sovereign credit profile. Still, energy sector improvements will likely reduce some of the economic bottlenecks and pending finalization of labor and mining reforms could engender a positive confidence shock. On the fiscal side, the government is showing greater resolve to reduce fiscal deficits at a faster pace than we expected.
We are therefore affirming our ‘BBB-/A-3’ foreign currency and ‘BBB+/A-2’ local currency ratings on South Africa.
The outlook remains negative, reflecting the potential adverse consequences of low GDP growth and signaling that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around.
RATIONALE
South Africa’s weak economic growth, relative to that of peers in similar wealth categories, continues to be hurt by a combination of factors, in our view. On the external side, adverse terms of trade and weak external demand have created headwinds. On the domestic side, drought and subdued mining and manufacturing output, coupled with structural constraints, remain key negative factors. Largely due to some of these cyclical factors, we have revised down our real GDP growth assumptions for South Africa to 0.6% in 2016 from our 1.6% forecast published in December 2015. As weather patterns and terms of trade revert to mean levels, economic growth should improve.
However, to place South Africa’s economy on firmer footing and to maintain our investment-grade rating, we see several structural measures as key. The first is the provision of a reliable source of energy, where we have observed progress. Eskom, the state-owned power utility, has improved the energy supply through a better maintenance program, managing demand in peak periods, and by additions from its new power plants and from independent power producers. The combined measures have helped eliminate load shedding, which was prevalent in the last winter cycle and depressed overall 2015 economic growth.
FEBRUARY has come and gone. The state of the nation and the budget, major policy statements on the economy, have been laid before an anxious public. What now? They say autumn is the most honest season. Leaves and flowers fall away to reveal what lies beneath. Summer’s hotheadedness gives way to an ominous chill. Already, the united front presented by President Jacob Zuma and Finance Minister Pravin Gordhan through the two major policy statements is fraying.
UPDATE: Hear Gordhan’s interview with Bloomberg on 10 March 2016 on measures South Africa will take to raise growth and maintain fiscal stability
In a recent column, I described the president’s state of the nation address as a dose of reluctant realism. His performance reminds one of the Roman mythical figure Janus, who is depicted with two faces — one facing forward, the other backward. In the state of the nation, we were presented with one of Zuma’s faces, looking forward to the future, preaching pro-growth and pro-reform sentiments. At other times, though, we are presented with another unrepentant face, one that looks back to the past few weeks (or years) and tries to justify poor decisions and lapses of leadership.
It is from Zuma’s other face that we receive disconcerting statements that undermine the work being done to restore the country’s economic policy credibility. He argued that markets overreacted to former finance minister Nhlanhla Nene’s removal in December. In an ironic display of credentialism, he lauded Desmond van Rooyen as the most qualified finance minister he has appointed. If anyone disdains the idea that a clutch of certificates trump determined self-education and a track record, it should be our president.