Cyril’s honeymoon is over: SA is in bigger trouble than we thought
Ramaphosa needs a closer ally in the private sector, in order to forge a new path
The past three budget speeches, given by two different finance ministers in the space of a year, have delivered sharply different messages.
If they were plotted on a graph, it would look like a pyramid. The first point was the medium-term budget statement in October last year, delivered by Malusi Gigaba. It was shock therapy. Gigaba, it was said, was being made the fall guy, haplessly announcing to the public that the government was in serious financial trouble. Debt was set to grow to record levels for the democratic era. Two ratings agencies swiftly downgraded the country to junk in its wake. That speech piled pressure on to the Jacob Zuma government for its fiscal waywardness.
But Gigaba also got to deliver the budget speech in February, and then took us straight to the peak of the pyramid. It had a tone of optimism. While debt was still substantial, there was a sense of being on the front foot, buoyed by the Cyril Ramaphosa-induced optimism of the first quarter. Debt requirements were revised downwards, reaching a maximum in three years and a promise of improvement after that.
But Tito Mboweni’s speech last week took us most of the way back to Gigaba’s sentiment impact. We are in trouble, and it is worse than we thought six months ago.
Between Pravin Gordhan and Mboweni’s speeches, the economic outlook has turned sharply worse, with the country in recession. Despite that, Mboweni made it clear, the government has been unable to consolidate expenditure and must now borrow more than previously thought. In the next two years the government will borrow R48,7bn more than it thought it would back in February.
The impact is clear to see in the Treasury’s bond yields – an indication of what the government will have to pay to issue all that debt. After Gigaba’s October speech, yields on the benchmark R186 spiked dramatically, reaching 9.47% by mid-November last year. The election of Ramaphosa as ANC leader marked a recovery, accelerated by Gigaba’s February speech.
By the end of March this year the yield was at a four-year low of 7.86%. Things have backtracked since, though, with yields now back up to 9.38%, having spiked on the day of Mboweni’s speech from 9.15%. The difference between the March low and current level makes a big impact in the cost of newly issued debt. The R230bn of gross debt that will have to be issued next year will now incur R3bn of extra interest that will have to paid every year.
That is a lot of money that could instead be spent on service delivery and infrastructure.
So it is crucial that Ramaphosa finds a way to get the country back on the front foot. The recession has severely damaged South Africa’s ability to attract funding at a time when it desperately needs it. He also lacks the political space to reign in the cost of the government. The space he has available is to try to turn the private sector into a closer ally.
And hence last Friday’s Investment Conference in Johannesburg. This was primarily about Ramaphosa using the political space he has. The pledges of investment made were largely optics. Anglo American’s R71.5bn, for instance, which made up more than half the R134bn pledged, was clearly part of its existing capex plan. The group had already budgeted capex of $2.4 to $2.6bn for this year.
These pledges, therefore, won’t move expectations of weak economic growth. But what mattered more than the numbers was the spectacle of Ramaphosa, flanked by Economic Development Minister Ebrahim Patel, sharing a stage with big-business heavy hitters.
Business people were elated to be given the space. Casting the issue as one of investment has allowed Ramaphosa to use the conference to enhance his political standing as the man who can get the money flowing. What’s less said is that for the investment flows to be sustainable, and to actually make a difference to the economy, he has to make fundamental changes to the policy environment and the government’s own financial management, including the costs of the civil service and state-owned enterprises. That uncomfortable subtext will only come to the fore after next year’s national election.
The conference was also a masterstroke in demonstrating the irrelevance of several political leaders. Deputy President David Mabuza was nowhere to be seen, having taken a few days’ sick leave. Was he back in Russia, many wondered, where he’d been treated in 2015 for an alleged poisoning, having allegedly flown there on a Gupta jet?
Other ministers, though, were at the conference, including Gigaba and Bathabile Dlamini, who must have felt like yesterday’s people. As Ramaphosa starts forging a genuine compact between business and government, with labour given a clear oar in the water too, those political actors will increasingly lose traction and relevance.
The Mboweni speech and the Investment Conference spectacle could not have been further apart in terms of the sentiment impact, but both served a clear political purpose.
The path we have been on has got us into trouble. We urgently need to forge a new one, and the outlines of that path became evident on Friday.
While Ramaphosa has had six difficult months after the honeymoon period of his presidency, Friday gave him a slight shift in trajectory. If he is able to consolidate that shift and use it to strengthen his political power to deliver genuine economic reforms, the next point on the pyramid graph may be a new peak.