2020 Budget Preview

Publication Date: 24/02/2020

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:

• A clear and sustainable plan to deal with the operational and financial crisis at Eskom, which is an immediate threat to the fiscus and the economy.
• Creating an environment to grow existing and new businesses to broaden the corporate tax base and increase employment. The National Treasury’s policy paper on Economic Transformation, Inclusive Growth and Competitiveness sets out the microeconomic reforms needed to boost growth. Endorsed by the President, ministers need to be held accountable for the urgent implementation of its recommendations.
• A reduction in the public sector wage bill and ensuring future increases are within inflation targets. The creation of a ‘fit for purpose’ public service will ensure that resources are directed to improving people’s lives through the efficient and ‘caring’ delivery of basic services to those that need them.
• The Auditor-General has estimated that for the 2018/19 year alone, reported irregular expenditure was as much as R61.35 billion. Reducing this will help meet the target of R150 billion in savings over the next three years. The appropriate law enforcement agencies need to pursue the recovery of funds lost to ‘state capture’ with urgency. If these resources are recovered, there will be no need to put the savings and investments of South Africans at risk by using pension funds and prescribed assets to support state enterprises.
• A modest increase in VAT, with a widening of the basket of exclusions to protect the poor, while unwelcome, may be the only way to increase tax revenues. South Africa’s corporate tax rate is already among the highest in the world and already hard-pressed consumers cannot absorb an increase in personal income tax rates.
• Stopping wastage of resources by ensuring there is no funding of vanity projects, including non-strategic and unsustainable state enterprises.

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.

• BASA and its members accept that increased competition in the banking industry does benefit South Africans. However, competition in the banking industry is already fierce and four new banks have recently entered the South African market; 80% of South African adults have access to a transactional bank account and banks are committed to meeting the transformation targets set out in the Financial Sector Code.
  The Finance Minister has indicated that a state bank would be a deposit-taking institution. As such, it must be regulated in the same manner as commercial banks, to protect the savings of its depositors. It makes no sense for the government to invest scarce resources, now, in a new institution for which there is no need and has no clear distinguishable advantage.
• A sovereign wealth fund is an ideal to which the country must strive, but currently we do not have a have a budget surplus to invest in such an initiative.
• BASA and its members support the provision of affordable accessible healthcare to all. However, resources should first be directed at strengthening and improving existing health services, so that it can meet the ideals of the NHI.

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.