In the 2020 budget Finance Minister Tito Mboweni must set out a programme of action that will reduce South Africa’s unsustainable debt burden; lead to the implementation of reforms to enhance the economic growth necessary to tackle South Africa’s unemployment crisis and defend our last investment grade credit rating.
The State of the Nation Address (SONA) had many positive statements, but these were overshadowed by the repetition of political rhetoric and proposals that appear at odds with the country’s fiscal and economic realities. It is up to the Finance Minister to prioritise what can be done and what should not be done – within the limits of what we can afford – so we do not burden future generations with even more debt.
For South African banks, and the jobs and economic activities that they support, the Finance Minister’s priority must be to prevent a further credit ratings downgrade – to ‘junk’ status – by Moody’s Investor Services. If South Africa’s credit rating is downgraded, the credit ratings of all the country’s banks will also be downgraded. South African banks’ credit ratings cannot be higher than that of the country.
A poor credit rating increases the cost of funding for banks which in turn increases borrowing costs for businesses, consumers and government. All South Africans who borrow money will have to pay more in interest to compensate for the greater risk premium to which lenders are exposed. The increased cost of funding also reduces banks’ ability to lend to small businesses and extend credit for entrepreneurship and personal development.
Those that dismiss the importance of ratings agencies often do not understand the economic realities of the global capital markets, from which South Africa has to borrow to keep the economy and government services running, because the country does not have enough savings of its own. While a downgrade may already have been somewhat priced into the South African markets, a formal announcement threatens the economy with capital outflows, a weaker rand and higher inflation than would otherwise have been the case.
South Africa’s economic growth is expected to stagnate below one percent over the next few years, while the debt to gross domestic product (GDP) ratio is forecast to accelerate beyond 70%. Debt repayments are set to crowd out spending on the economic infrastructure and essential services necessary to maintain the social stability on which we all depend.
Key considerations for the 2020 budget, to be implemented with clear and urgent deadlines, include:
The President has committed the country to the creation of a state bank, a sovereign wealth fund and a National Health Insurance (NHI) system. The intent behind these initiatives is laudable, but given the country’s precarious financial position, at present, their implementation must be at a pace and scale to be determined by the available resources and national priorities. If these programmes are not implemented cautiously, and without proper social and economic impact assessments, the unintended consequences for the country may be dire.
The Finance Minister has the unenviable task of having to chart an economic path that will lead to the implementation of growth enhancing reforms and a reduction in government’s unsustainable debt burden, at a time of economic stagnation and political and policy uncertainty. We wish him well: South Africa needs him to succeed.