The South African government will have to take decisive action if it hopes to avert a fiscal meltdown over the next five to 10 years. Kevin Lings, chief economist at Stanlib, said that urgent intervention was needed to avoid the worst case debt-to-GDP pathway set out in finance minister Tito Mboweni’s 24 June 2020 supplementary budget. “If government carries on as usual and the economy continues to struggle, then debt will ramp up to a forecast 140% of GDP by 2028/9,” he said. “We are heading towards a fiscal crisis that ends with a debt default, an IMF bailout, or an extensive prescribed asset scenario”. Lings was commenting during a Liberty Budget Commentary panel discussion, hosted by Bruce Whitfield, held 29 June 2020.
A debt storm blotting the horizon
A debt-to-GDP ratio of more than 50% is of grave concern to a country like South Africa; but at 100% we enter similar territory to that experienced by the so-called PIGS (Portugal, Italy, Greece, and Spain) during the 2009 Global Financial Crisis. Lings pointed out that Mboweni had played open cards with Cabinet and the people of South Africa in presenting the cold hard truths about the country’s economic challenges. First off, Mboweni acknowledged that the country was facing the largest economic contraction in history, with a forecast 7,2% slump in GDP for 2020. Stanlib’s prediction is for a slightly deeper cut of 9,7%.
The finance minister also confirmed that National Treasury expects an under recovery of around R304 billion in revenue for the 2020/21 year. “If you add up all the revenue collection shortfalls over the past eight years you do not get to this number,” said Lings. He added that expenditure on COVID-19 relief, coupled with the time it takes for government expenditure cuts to filter through to the budget, meant that the gap between expenditure and revenue would be extreme. The budget deficit is forecast to widen to almost 15% this year, while debt-to-GDP balloons to 80% by end-2020.
Four ways to avert fiscal crisis
“We are not only in the realm of a fiscal crisis, where debt default becomes a discussion point; but also entering an environment where we will struggle to fund this debt domestically,” he said. Government has already turned to the IMF and World Bank for around US$2 billion in funding, something that was previously unheard of. South Africa will face one of two debt scenarios between now and 2028/9. The first option is to continue on our current path and face the unpleasant prospects mentioned in the opening paragraph. The second, described as an active scenario, would perhaps reduce our debt-to-GDP to 73,5% by that year.
What has to change? According to Lings, public sector wages must be tightly controlled; government must be more sensible about spending; zero-based budgeting should be considered; and economic growth, perhaps through another infrastructure drive, should be rekindled. “Under this scenario we avert a fiscal crisis,” said Lings. But the jury is out on whether government has the discipline to deliver the required changes. They have a long record of failed economic growth plans, and now have the added pressure of tight timeframes. “Time is not on our side and we cannot afford to take a wait-and-see on this,” he said. Many expect the first tentative steps to implement change, being a renewed focus on private / public infrastructure partnerships, being scuppered by a showdown with unions early in 2021.
Longing for better times
Many South Africans will be left wondering how a country with so much potential came to this. At the end of 2008, the country was sitting pretty with an impeccable set of economic and fiscal credentials. Government debt was at a mere 26% of GDP; foreign ratings agencies rated us at investment grade; we had growth at near 5% per annum; and we had created 1,5 million jobs in the preceding decade. By end March 2020, we were eyeing 60% debt-to-GDP; our investment ratings had been slashed by all three major ratings agencies; we had slumped to 0,8% average annual GDP growth over the last five years; and were approaching 30% official unemployment. And then the coronavirus hit.
We now face a best case of 73,5% debt-to-GDP a decade from today; with a worst case being the debt default; IMF bailout; or pension fund raid that occur as we near 140% debt-to-GDP or worse.
The Liberty Budget Commentary was upbeat about ongoing opportunities in financial markets; but raised major concerns about whether government would be able to rein in its spiraling debt burden. What do you see when you look 10 years into the future? Will South Africa get to grips with its debt or will we face one of the unpleasant alternatives of debt default, IMF bailout, or prescribed assets?