Tough budgetary choices put South Africa on a fiscally sustainable path

“This is the challenge of our time, to build a South Africa in which all people have a decent standard of living, access to economic opportunities and opportunity to pursue their dreams.” – Malusi Gigaba Budget Speech February 2018

Minister of Finance Knowledge Malusi Nkanyezi Gigaba says South Africa must confront and overcome a number of challenges if it is to sustain growth [GCIS]

In his briefing to journalists before his budget Speech, Finance Minister Malusi Gigaba was at pains to point out that the media should look at the budget holistically and not just focus on a few points such as raising taxes.

“We have a positive narrative to tell and that is reflected in the raising of our gross domestic product (GDP) growth projections. We have taken the tough decisions to put us on a fiscally sustainable path while at the same time undertaking growth enhancing initiatives,” he said.

“After several years during which economic growth undershot our projections, we now see the improved growth projections for 2018 and subsequent years as a floor, rather than a ceiling. We are convinced that as business and consumer confidence return, and as government follows through on its commitments to enable growth with prudent, fast and decisive action, we can exceed our growth projections,” he said in his Budget speech.

The toughest choice to make was raising the Value-Added Tax (VAT) rate from 14 per cent to 15 per cent, which puts it on a par with neighbouring states. This is the first VAT rate increase since 1993 and the first done by an African National Congress government. It will add R22.9 billion ($2 billion) to revenue every year.

The other tough choices involved cutting state expenditure, as programmes that were not efficient were cut. The total saving over the next three years was R85 billion, but these savings were to a certain extent offset by the additional R57 billion needed to provide free tertiary education.

The bottom line is that at the time of the October 2017 MTBPS, gross national debt was projected to breach 60 per cent of GDP in 2021/22, and continue rising thereafter. This Treasury projection reflected major revenue shortfalls, weak economic growth and a limited policy response. It prompted a sell-off in the rand in October and November 2017.

The outlook also represented a major departure from the 2017 Budget figures, which previously showed the debt-to-GDP ratio declining from 2018/19 onward.

Scenarios for growth

In the 2018 Budget, the combination of higher GDP growth, a narrower deficit, a stronger currency and lower borrowing rates results in an improved debt-to-GDP outlook, with debt stabilising at 56.2 per cent of GDP in 2022/23, but still above the February 2017 budget projections.

The 2018/19 Budget raises the growth trajectory by an average of 0.4 percentage points compared with the projections given in the October 2017 Medium Term Budget Policy Statement (MTBPS). Although this may not sound like much, for 2016 this margin would have been the difference between positive growth and negative growth as GDP growth in that year was only 0.3 per cent.

In other words, Treasury has now added more than 2016’s growth rate to its projections, which will make a significant difference to the citizens of South Africa.

The 2017 GDP growth projection has been revised upward to 1.0 per cent compared with the 0.7 per cent expected in October. Growth then increases to 1.5 per cent this year compared with 1.1 per cent.

What is more is that because the future is uncertain, Treasury have modeled three scenarios so South African citizens know the range of possibilities.

In the first scenario, Moody’s downgrades local-currency debt further, so the impact of that is to lower GDP growth to 0.7 per cent in 2018. In the second scenario, risks in the state-owned company sector result in a fiscal crisis as Treasury has to bailout the sector. In that scenario the economy contracts by 3.1 per cent this year and by a further 0.3 per cent next year and all the growth of the last four years is essentially wiped out with unemployment increasing.

That is why reform of the state-owned company sector has such a high priority in government and why it was one of the first things that Cyril Ramaphosa undertook even before he was elected as President on February 15 2018.

The third scenario assumes that the increase in business confidence already evident at the beginning of 2018 is maintained and improves further, global growth accelerates by an annual average of 0.5 percentage points, the risk premium on South African government debt is on average 50 basis points lower and bond yields on South African government debt declines by an average of 70 basis points reducing our debt service costs.

In such a scenario, which has a high probability of becoming reality, GDP growth accelerates to 2.1 per cent in 2018, 2.9 per cent in 2019 and 3.2 per cent by 2020, as higher income growth promotes stronger consumption and investment demand and a virtuous cycle kicks in leading to sustainable growth as in the 2004 to 2007 period.


Higher growth allows the state to undertake robust structural reforms bolstering confidence and investment.

Helmo Preuss in Pretoria, South Africa for The BRICS Post

President Ramaphosa inspires in maiden State of the Nation Address

“Send me” is his call as he invokes the legacies of South African icons Nelson Mandela, Albertina Sisulu and Hugh Masikela

Ceremonial parade ahead of the State of the Nation Address in South Africa, February 16, 2018 [PREUSS]

As analysts told The BRICS Post in mid-December, the recall of President Jacob Zuma by the African National Congress (ANC) will be the first test of its new leader, Cyril Ramaphosa.

This was not easily accomplished and it took a postponement of the State of the Nation Address (SONA) from February 8 to February 16 and the threat of a no confidence motion in Parliament, before disgraced former President Jacob Zuma heeded the call of the party he had given his life to and resigned close to midnight on Valentine’s Day.

Cyril Ramaphosa was then elected President by Parliament the following day and in his maiden SONA, Ramaphosa reminded the world that both Nelson Mandela and Albertina Sisulu would have celebrated their 100th birthday this year.

“This Address should have been delivered last week, but was delayed so that we could properly manage issues of political transition. I wish to thank Honourable Members and the people of South Africa for their patience and forbearance,” he said in his opening remarks.

“In celebrating the centenary of Nelson Mandela we are not merely honouring the past, we are building the future,” he continued.

Radio commentator Chris Gibbons told The BRICS Post in December that it was too early to tell what the impact of a Ramaphosa Presidency would be on South Africa, although he noted that financial markets had taken a very positive view of his election victory.

“It’s far too early to tell what the Ramaphosa victory means, particularly because of the ‘hung’ nature of the ANC’s Top Six. If he can achieve the recall of Zuma before February’s State of the Nation speech, along with the installation of a new finance minister, South Africa will be pointing in the right direction,” Gibbons said.

Nelson Mandela University Business School Professor Chris Adendorff was equally optimistic when he spoke to The BRICS Post.

“All in all I am very excited about what lies ahead and we will shortly see a surge of new investors and countries ready to assist South Africa out of deep waters,” he said.

Renewed economic spirit

The rand has been the best performing currency in the world against the US dollar over the past few months as it strengthened by more than a quarter (26 per cent) from R14.57 per US dollar on November 13 to R11.56 on February 16, 2018.

In the first six weeks of this year, foreigners bought a net R16.8 billion ($1.45 billion) worth of South African equities compared with net sales of R22.1 billion ($1.9 billion) in the same period last year.

In his SONA Ramaphosa gave a set of targets that he wanted to achieve so that there would be no further ratings downgrades and economic growth would go back to the 5 per cent plus growth rates of Zuma’s predecessor, Thabo Mbeki.

The list is fairly extensive as the recent erratic and irrational behaviour of Zuma cost South African equity investors almost R2 trillion ($172 billion) in lost wealth according to equity analyst Ryk de Klerk,  if one compares the rating of the Johannesburg Stock Exchange before Zuma fired respected Finance Minister Nhlanhla Nene in December 2015 and its recent rating.

The number one priority is creating more jobs as South Africa’s unemployment rate is more than 26 per cent with youth unemployment near 50 per cent. To this end Ramaphosa said there will be a jobs summit this year‚ as youth unemployment‚ was “our most grave and pressing challenge”.

The recent declaration of a national drought condition has highlighted the neglect of water infrastructure projects during the Zuma years, as the second phase of the Lesotho Highlands Water Project, which brings much needed water from Lesotho to water-scarce South Africa, is years behind schedule. The agreement between the two countries was signed way back in 2011, yet no work has been started on the main dam and first water is only likely to flow to South Africa in 2025 rather than the original 2020.

“I will assemble a team to speed up implementation of new projects‚ particularly water projects‚ health facilities and road maintenance,” Ramaphosa said.

Focus on the mining industry

Another failure of the Zuma years has been the steady decline in the mining industry, once the bedrock of what made South Africa a great place to live in and resulted in South Africa being the top gold producer for more than a century since the discovery of gold on the Witwatersrand in 1886.

South African Chamber of Mines Chief Executive Officer Roger Baxter told The BRICS Post last week that last year was the worst year for the mining industry in terms of the regulatory environment. This was due to the unilateral imposition by the South African government of the third iteration of the Mining Charter, which wiped out more than R50 billion off the market capitalisation of South African mining companies.

Ramaphosa said mining should be seen as a sunrise industry rather than a sunset industry, despite the fact that net fixed investment in the mining industry has declined by 57 per cent since 2008.

“I am certain we will be able to resolve the current impasse and agree on a mining charter that both accelerates transformation and grows this vital sector of our economy,” Ramaphosa said.

A legacy of the Zuma years has been an expanded civil service while private sector employment has been stagnant as patronage permeated the tendering and procurement practices of government at all three tiers of government as well as state-owned enterprises (SOEs).

“We will initiate a process to review the configuration‚ number and size of national government departments. The recent action we have taken at Eskom to strengthen governance‚ root out corruption and restore its financial position is just the beginning,” Ramaphosa said.

At the end of his speech Ramaphosa invoked the words from Hugh Masekela’s song ‘Thuma Mina’.

“We are at a moment in the history of our nation when the people, through their determination, have started to turn the country around. We can envisage the triumph over poverty, we can see the end of the battle against AIDS. Now is the time to lend a hand. Now is the time for each of us to say ‘send me’. Now is the time for all of us to work together, in honour of Nelson Mandela, to build a new, better South Africa for all, ”Ramaphosa concluded.

Private wealth management expert Ben Pieterse told The BRICS Post that he found the speech inspiring and filled him with hope.

“What a man. A President we can be proud of. His speech was one of hope and meaning,” he said.

Helmo Preuss in Grahamstown, South Africa for The BRICS Post

BRICS urged to boost parliamentary cooperation

Increased parliamentary exchange can boost economic recovery, intra-BRICS trade and a greater role for emerging economies in the international financial architecture [Xinhua]

BRICS member states at a forum in the the Russian city of St. Petersburg have concluded that they want to strengthen parliamentary cooperation between them.

The parliamentary forum, chaired by China, comes on the heels of the 9th BRICS Summit held in the Chinese city of Xiamen last September.

The forum reiterated the theme of the Summit – “Strong Partnership for a Brighter Future” – which also called for increased exchanges and work between all five parliaments of the BRICS member nations.

Russia, in particular, has been pushing to move bilateral parliamentary exchanges and cooperation to a more robust mechanism which includes all five countries in a bid to safeguard shared economic, social and political strategic interests.

Zhang Ping, vice chairman of the Standing Committee of China’s National People’s Congress, who chaired the forum believes that together as a consolidated parliamentary bloc, BRICS nations can influence international governance reforms.

The next BRICS Summit will be held in Johannesburg, South Africa next year.

The BRICS Post with inputs from Agencies