2020 Medium Term Budget Policy Statement

The Medium Term Budget Policy Statement (MTBPS) was a frank assessment of the public purse and the state of the economy and clearly set out some of the painful trade-offs that will need to be made in the years ahead if South Africa’s Economic Reconstruction and Recovery Plan is to succeed.

The MTBPS, presented by the Minister of Finance, Tito Mboweni, details an increase in government spending over the next few years and further pushes out debt stabilisation targets, while forecasting weak economic growth and revenue collection. However, the minister acknowledged the real and imminent danger of a debt trap and a fiscal crisis if government does not act decisively and urgently to stabilise debt and redirect public spending in favour of investment, growth and job creation.

BASA supports responsible, sustainable spending on social security, employment stimulus, infrastructure development and structural economic reforms, as set out in the reconstruction and recovery plan. While South Africa needs to slow the pace at which it is spending, there is a danger that a too sharp and sudden a cut in government expenditure will exacerbate the country’s economic crisis. The only sustainable way to ward off a fiscal crisis is to accelerate inclusive economic growth and job creation by creating conditions for private sector investment in productive infrastructure. Banks are ready to invest resources in sustainable, commercially viable projects that will serve the needs of their customers, shareholders and all South Africans.

Government needs to make better use of its scarce resources. The MTBPS stopped short of setting a clear framework and timeline for making tough and necessary choices on which state-owned corporations remain relevant for its development agenda. Attempts to revive South African Airways (SAA) at a time when the airline industry is in a precarious state only serves to sow doubts as to whether government is ready to make the required hard choices. It also undermines confidence in government’s ability to stick to the announced five-year plan to reduce the budget deficit and stabilise its debt levels – despite its commitment to maintaining the fiscal framework.

BASA welcomes the effort to contain the public service wage bill. The wage bill is estimated to make up 32% of the budget and curtailing its growth is an important part of fiscal stabilisation. Of course, there are huge risks to this plan, including the outcome of the court case pertaining government’s plans to revise the last year of the previous wage settlement.

As it stands:

Banks lend to government from the savings that South Africans deposit with their banks for safe-keeping and to earn interest. The South African government is the biggest debtor of the country’s banks. The last Financial Stability Review of the South African Reserve Bank (SARB) points out that: “The banking sector-sovereign nexus poses three key risks to financial stability at this stage. First, rising fiscal risks are placing upward pressure on borrowing costs across the economy, potentially exacerbating the adverse effects of COVID-19. Second, the capacity of government to provide a backstop to the banking sector is limited, which could make the sector more vulnerable to contagion. Third, the fiscal deficit for the current year is the largest in a century and will need to be reduced considerably over the medium term. This fiscal adjustment could impair the economic recovery from Covid-19.”
Government debt makes up 15% of bank assets, according to the Financial Stability Review. However, because South African sovereign debt is deemed to be risky by investment rating agencies, this harms the creditworthiness of South African banks. This increases the costs of funds for banks, leaving them less able to raise funds that they can extend as credit for business and personal loans. Unfortunately, the MTBPS is unlikely to do much to improve South Africa’s standing with credit rating agencies.
Banks also raise money on international markets and use their customers’ savings to lend money for investment in economic infrastructure and extend credit to companies that use these funds to invest and create jobs. The more banks lend to government, the less they have to extend credit to the large and small businesses that drive inclusive economic growth and job creation.

While South African banks are well-capitalised and will be resilient in the event of government not being able to sustain its debt, it is worth noting the warning that a fiscal crisis in South Africa could contribute to a banking and financial crisis, especially since banks are facing more and more demands to support sometimes unsustainable recovery and development initiatives.

The ongoing impact of the Covid-19 pandemic and South Africa’s weak fiscal position and stagnant growth – which long pre-dated the national lockdown – makes any estimate of economic growth or budget expenditure uncertain. As it stands, government’s tentativeness in implementing structural reforms is the biggest risk to inclusive economic growth.

The budget policy statement is a declaration of intention before the next budget announcement, due in February 2021. The real test is going to be whether there is political will to execute the reform agenda and to correct the fiscal position of the country with the urgency that the situation requires. In the coming days and weeks, government must implement key elements of the presidential Economic Reconstruction and Recovery Plan if there is to be any improvement in business, investor and consumer confidence – the best way to boost economic growth. Efforts to open the electricity market and secure a reliable power supply and movement on the auctioning of digital spectrum are acknowledged, but not enough.