What is the most important ingredient of economic success? You can make an argument that it is the rate of technological progress.

Deputy president David Mabuza told the National Assembly in Parliament  that the committee on land reform, which he chairs, was fundamentally opposed to land reform that would leave farms derelict and unproductive.

The African National Congress (ANC) in South Africa is attempting to give white-owned land back to its Black indigenous population, after a legacy of colonization resulted in this theft, thus denying Black South Africans of many economic opportunities.

A strong Budget will come down to simple action and hard choices taken now for the long-term benefit of the country, says Citadel portfolio manager Mike van der Westhuizen.

Finance minister, Tito Mboweni will deliver the 2020 National Budget Speech on 26 February, to announce how the government plans to spend its budget, while also collecting money.

“The main thing to look at, given that the Moody’s is watching closely, is the need to rein in the budget deficit, which is starting to spiral even more out of control,” he said.

In the 2019 Medium Term Budget Policy Statement (MTBPS) the Treasury projected a consolidated Budget deficit of 5.9% of GDP, averaging 6.2% of GDP over the next three years.

A low growth, low inflation environment also affects the debt-to-GDP trajectory, the sustainability of which minister Mboweni has already warned about.

As a proportion of South Africa’s GDP, the MTBPS notes a hike in gross debt from 56.7% in 2018-19, to 60.8% in 2020-2021 and 71.3% in 2022-23 if the status quo does not change, something the rating agencies are understandably concerned about.

“These numbers show that the previous goal of fiscal consolidation is currently not on target,” said Van der Westhuizen. “Although it must be said that while Treasury appears to be doing everything in its power to stop the slow bleed, it’s a cooperation issue with the rest of government and other influential stakeholders.”

This disconnect between what needs to happen and the disinclination within government to act is likely to come through on Budget day.

Revenue under pressure

Distilling the multiple issues at play, Van der Westhuizen said that “government needs to find about R150 billion in savings over the medium-term expenditure framework, being the next three years. So that’s essentially R50 billion a year in savings that needs to come through.”

But how can this be achieved?

Treasury could look, once again, to the taxpayer. But, said Van der Westhuizen, “with the taxpayer already squeezed, options are increasingly limited. In prior years, we’ve seen personal income tax hikes and last year a VAT hike”.

“Easy wins are fuel levies and sin taxes that rise every year, as well as bracket creep, i.e. not adjusting the tax brackets for inflation. Other potential tax avenues could include a new upper tax bracket, wealth tax, estate duties or even changes to capital gains tax or dividend tax. Although helpful, these don’t really do the heavy lifting.”

There has been talk that the only really effective lever left to pull could be to raise VAT by one percentage point to 16%, which would inject between R20 billion and R35 billion in revenue. Although it would be a particularly unpopular move politically, it is increasingly possible, said Van der Westhuizen.

Expenditure in the crosshairs

Given the revenue constraints, Van der Westhuizen believes all the hard work should be done on the expenditure side. But, again, taking steps to contain and curb expenditure will come down to political will.

“The big line items here are public sector wages (about 34% of expenditure), debt service costs (10%) and social grants (10%). Interest payments and social grants are essentially fixed, leaving the wage bill as the main lever.

“This is a bit tricky at this stage since multi-year wage negotiations are still in process and will only conclude around March 2021, so we will watch this carefully,” said Van der Westhuizen.

“The government tried a voluntary resignation and natural attrition approach to reduce the wage bill, but that hasn’t been effective. Maybe the lower inflation outlook from the Reserve Bank and pinning of inflation expectations might help in negotiating lower wage hikes, but that is unlikely to be enough.”

“Even if government took a firm stance of CPI less 2%, which would have the trade unions baying at its feet, it would only save about R105 billion over three years, leaving us some R45 billion short. The point is that even a drastic decline in wage growth doesn’t result in sufficient scaling back in spending,” Van der Westhuizen said.

The SOE drag continues

Despite this constrained picture, there is still bound to be more budgetary support doled out for state-owned enterprises (SOEs) and this issue will loom large over Mboweni’s speech, said Citadel.

“In late-January we saw the Development Bank of South Africa (DBSA) grant a loan to South African Airways (SAA) as part of its restructuring,” said Van der Westhuizen.

“That represents a red flag in terms of the cross contamination of SOEs, with a well-performing SOE such as the DBSA bailing out a poor-performing one. Government cannot afford to use its balance sheet to rescue these SOEs, so it is rearranging the deck chairs.

“Our concern is the strain this might put on the better-performing SOEs. For now it might not be a big issue given that the DBSA does have rules governing its lending, but the trend isn’t pleasing.”

And Eskom is likely to remain both a concern and a drain. Clearly there is much in-fighting at the parastatal and disagreement about its turnaround direction coupled with bouts of load shedding, which indicates that South Africa is certainly not out of the woods. “Eskom will, again, be a massive issue to watch for in the Budget,” said Van der Westhuizen.

“For at least the next few years, support will have to be pencilled in for the utility. If that number were to rise significantly or if there were further talk of taking Eskom debt on the government balance sheet, then we would be in deep trouble.”

What could prove a fillip for the country would be positive developments around key issues such as power generation.

“There has been much talk about mining companies, and other businesses, being permitted to generate their own electricity and for independent power producers to come onto the gird, but we are yet to see formal communication in this regard.

“If something concrete is announced, even some compromise around public-private partnerships, then that would be very positive,” said Van der Westhuizen.

The D-Day downgrade

While the state fiddles, and South Africa’s economy burns, a downgrade in the country’s sovereign credit rating continues to hang over South Africa’s head. While the markets have long priced this in, the continued expectation that the axe will fall is, in itself, creating uncertainty and tension.

On 28 January 2020 Moody’s Investors Service analysts noted that it was “a bit early” to judge the impact of both policy and structural reforms. Lucie Villa, Moody’s lead sovereign analyst for South Africa, told Bloomberg that while the data was not pointing to either a particularly positive or negative direction, that “there is nothing really to flag for the time being”.

This indicates that Moody’s may well be prepared to give SA more leeway, but obviously, the credit rating agency will be keeping a close eye on Mboweni’s Budget.

“Certainly, everyone expects this Budget to be poor,” said Van der Westhuizen, “but they might manage to demonstrate the will to cut expenditure and show just enough fiscal consolidation and, in that case, Moody’s might delay any decision until November, after the next MTBPS.”

That said, while government might do enough to keep Moody’s at bay for the first half of this year, it remains Citadel’s view that the agency will downgrade South Africa in 2020. While this would put South Africa out of the World Government Bond Index, Van der Westhuizen believes it is time for the country to take its medicine.

“Foreigners would come in and sell some of our bonds on index exclusion but, with some of the most attractive yields available, there would definitely be buyers stepping in,” he said.

Reading the mood

Citadel noted that anyone who follows Mboweni on Twitter will be keenly aware that the finance minister is getting significant pushback, making him increasingly despondent with the lack of progress. There appears to be considerable opposition to his plans, as laid out in the economic strategy document released in August 2019.

"The country's political and economic realities hold various serious threats and a very uncertain outlook for 2019 as far as the ANC government's political and economic policy is concerned.

In a few months time, as winter begins to bite in the southern hemisphere, the African National Congress will face its biggest challenge since it took power in South Africa’s first free elections a quarter of a century ago.

The African National Congress’ January 8 Statement and manifesto are reminiscent of what an analyst once said of the country’s foreign policy: ‘a little bit of this and a little bit of that’.

The outlook that South Africa ‘will only run out of money by 2042, is totally unrealistic and creates a greater comfort zone for the ANC government and could lead to total misleading economic prospects for the country," says Fanie Brink, an independent agricultural economist.

“Die vooruitskouing dat Suid-Afrika eers teen 2042 ‘oor die fiskale afgrond sal stort’ is totaal onrealisties en skep ‘n groter gemaksone vir die ANC-regering en kan tot totale misleidende ekonomiese vooruitsigte vir die land aanleidng gee," sê Fanie Brink, 'n onafhanklike landbou-ekonoom. 

It is a great pleasure and great honour to be here to speak at the launch of the Southern African Agricultural Initiative. For years, we at the institute of Race Relations have taken a keen interest in the fate of the farming sector – both out of concern for its own sustainability, and for what it signifies for the country as a whole.

The most recent state-backed land conference in Pretoria was full of sunshine. Through an ionic colonnade, the generous tiled portico of St George’s Hotel gave onto a neatly styled courtyard garden nestled between mosaics of ancient gods and cherubs and fountains and ponds.

One cold morning, Stefan Smit, a white farmer in South Africa’s stunning wine region, woke up to find his vineyard under siege.

In South Africa, the issue of land ownership is dominating debate in the run-up to the general election. 

On the eve of credit ratings agency Moody’s next decision over South Africa’s economic state, it is very clear that the ANC’s policy has finally forced the country into an economic quandary.

The ANC government has no idea that economic growth and progress are totally dependent on the profitability and sustainability of all the individual industries, such as, among others, the production, manufacturing, construction and trading industries in the primary and secondary sectors, as well as the service industries in the tertiary sector of the economy,” says Fanie Brink, an independent agricultural economist.

Die ANC-regering het geen begrip daarvoor dat ekonomiese groei en voortuitgang totaal afhanklik is van die winsgewendheid en volhoubaarheid van al die individuele bedrywe soos, onder andere, die produksie-, vervaardigings-, konstruksie- en handelsbedrywe in die primêre en sekondêre sektore, asook die dienstebedrywe in die tersiêre sektor van die ekonomie nie,” sê Fanie Brink, ‘n onafhanklike landbou-ekonoom.

Our life is hell! This farm has been in our family for generations. My forefathers struggled from the boat to the South African coastline. I am an old man but what about my two sons? One son says he doesn’t know if he can raise his children on this farm.”

"The statements that nothing will change if the Reserve Bank is nationalised are not correct as it poses a very serious threat to the economy and the country because it is directly targeting the control and access to the country’s gold and other foreign reserves,” says Fanie Brink, an independent agricultural economist.

“Die uitsprake dat niks sal verander as die Reserwebank genasionaliseer word, is nie korrek nie want dit hou ‘n baie ernstige bedreiging vir die ekonomie en die land in omdat dit in werklikheid direk op die beheer en toegang tot die land se goud en ander buitelandse reserwes gemik is, sê Fanie Brink, ‘n onafhanklike landbou-ekonoom.

Hy het na die voormalige president, Thabo Mbeki, en die goewerneur van die Reserwebank, Lesetja Kganyago, verwys wat hierdie misleidende uitlatings verlede week gemaak het.

Volgens die Reserwebank se jongste kwartaalverslag het die land se totale bruto goud en ander buitelandse reserwes, hoofsaaklik buitelandse valuta, teen die einde van Februarie vanjaar R736,6 triljoen beloop.

Die mandaat was baie jare lank deur die Reserwebank se eie Wet voorgeskryf om die “inflasiekoers in toom te hou,” maar dit is later deur die regering verander na die “beskerming van die geldeenheid in belang van stabiele en volhoubare ekonomiese groei,” soos wat dit in artikel 224(a) van die Grondwet voorgeskryf word.

“Die Reserwebank is daarom nie onafhanklik van die regering nie, maar kan slegs sy mandaat onafhanklik uitvoer.”

Die besluit deur die ANC se Nasrec-konferensie in 2017 om die Reserwebank te nasionaliseer is nog nie in die parlement ter tafel gelê nie, maar hou beslis ‘n baie groter bedreiging vir die ekonomie en die land in as wat die uitsprake dat niks sal verander nie wil voorgee.

Sommige regeringslui het die besluit ook verder gevoer na hulle terugkeer van die Wêreld- Ekonomiese Forum se beraad wat in Februarie vanjaar in Davos, Switserland gehou was, met die voorstelle dat die nasionalisering van die Reserwebank daarop gemik moet wees om inklusiewe ekonomiese groei en werksgeleenthede te skep, wat bloot ‘n vaandel was waaronder die visier van die ANC op die land se goud en ander buitelandse reserwes gemik is.

Brink sê dat die aansprake dat die Reserwebank die inflasiekoers in toom kan hou en die wisselkoers kan beskerm, asook die ekonomie kan stimuleer, deur die toepassing van sy monetêre beleid om rentekoerse te verander is egter van alle waarheid ontbloot en daar bestaan absoluut geen bewyse daarvoor nie. Monetêre beleid is in werklikheid die grootste dwaling in die totale ekonomiese wetenskap.

“Die gevolge van die plundering en vernietiging van die land se reserwes deur die regering om die ANC-elite verder te verryk en langer aan bewind te probeer hou sal die laaste strooi wees wat die kameel se rug finaal sal breek,” aldus Brink.

ooooooOoooooo

Bothaville
29 April 2019
Navrae: 082 573 5661