Finance Minister Nhlanhla Nene gave assurances on Thursday that government was committed to fiscal prudence, despite additional spending pressures on the budget and promises of a major stimulus package to boost the economy.
Nene was addressing the Moody’s Sub-Saharan Africa Summit, but his comments hinted at what may lie in store in the upcoming medium-term budget policy statement (MTBPS), which will reveal adjustments to the national budget, in October.
This year’s MTBPS is being carefully watched as it is expected to reveal how the state will cope with new pressures on the budget such as an above-inflation wage increase for public sector workers. The settlement is expected to add over R30-billion to government spending in the coming three years.
The economic climate has also deteriorated in recent months on both the local and global fronts. South Africa’s economy has slipped into a technical recession, it emerged last week.
Since the delivery of a very tough budget in February global economic conditions have also deteriorated — as rumblings of a global trade war intensify and the crisis in countries such as Turkey and Argentina have spread to other emerging markets including South Africa further weakening the currency.
Nene said that the depreciation of the rand and an increase in government bond yields mean that more resources will be required to service debt.
Despite these pressures, Nene said that the cabinet has agreed “that fiscal sustainability must remain the focus of government’s efforts in public finance management.”
“This should be a statement that makes clear government’s intention to pursue a prudent fiscal policy that stabilises the debt-to-GDP ratio over the long term,” he said.
Similarly, President Cyril Ramaphosa would be announcing an economic stimulus package in due course.
But, said Nene, the president is clear that government’s participation in this programme will be “through existing budget resources and will be focused on unlocking efficiencies within the public sector”.
The proposed stimulus plan, however, is expected to cost well over R40-billion, resulting in scepticism that it can be done within the current budget.
Notwithstanding the public service wage agreement, the government was committed to the compensation ceilings presented in the 2018 medium-term expenditure framework said Nene and several options were under consideration to address the additional cost of the settlement.
These include an updated employee-initiated severance package and early retirement to encourage qualifying public servants to exit the public service.
Nene said that although the lower economic growth had the potential to undermine revenue targets “without disclosing any details” tax collections this year are performing “reasonably well despite the adverse economic environment”.
But a key focus for Nene was the importance of shifting government spending towards investment and away from consumption spending.
It was critical the country started “changing the conversation about our expenditure”, said Nene.
“Because a 50% or 60% [debt to GDP ratio] is not such a bad figure if the composition of expenditure is such that the bulk of it is an investment rather than in consumption.”
Along with the reforms to state-owned companies, currently underway, and the commission of inquiry aimed at improving governance at the South African Revenue Service, Nene said that the government was “redoubling efforts to address the main issue inhibiting growth: weak investment”.
The state was building a pipeline of investment opportunities and infrastructure projects and had identified 64 projects through the Budget Facility for Infrastructure, located within the Treasury. So far 38 projects had been subjected to rigorous financial and technical evaluation for possible investment.
Moody’s watching closely
Lucie Villa, a vice president and senior credit officer for the sovereign risk group at Moody’s said that the fact that the agency’s outlook for South Africa was stable indicated that there “is little chance of a rating action”.
Moody’s is the only credit rating agency that still retains South Africa’s sovereign debt rating above junk.
But what was announced in the MTBPS would be “critical” to its outlook for the country.
The rating agency was already factoring in some fiscal adjustments to its outlook but “we just need to know what are the details” Villa said.
Issues that would be watched closely included things like tax revenues and the wage bill, she added.