What has emerged since Finance Minister Pravin Gordhan’s 2016 Budget – which included tax hikes of R18-billion and a promise of R15-billion in expenditure cuts – is that fiscal prudence alone, while a necessary condition, will probably be insufficient to ensure that South Africa avoids being downgraded to ‘junk’. The other critical ingredient lies in offering a credible plan (with buy-in from business and labour) for returning the economy to higher levels of growth, principally by improving the investment climate and by removing policy uncertainty.
In the current context, this is easier said than done, as it requires not only greater cooperation from the social partners, but also ongoing political cover from the governing African National Congress.
The Budget Review, released alongside the speech, offered arguably the most frank assessment yet by government of the domestic and external factors undermining the growth outlook.
“In recent months,” the review states, “perceptions of risk associated with lending or investing in South Africa have increased. Deterioration in the credit-rating outlook towards the end of 2015 was followed by changes in the finance portfolio, catching investors off-guard and raising concerns about fiscal probity.”
In addition, China’s slowdown and the associated decline in commodity prices, together with the country’s worst drought in 20 years, were exacting a heavy toll. As a result, there have been successive downward revisions to South Africa growth outlook by, among others, the International Monetary Fund and the South African Reserve Bank, which both did not see South Africa expanding by more than 1% in 2016. Likewise, the National Treasury has lowered its growth forecast for the year from 1.7% in October to just 0.9%, with forecasts for 2017 and 2018 having also been lowered from 2.6% and 2.8% respectively to 1.7% and 2.4%.
So what can be done to turn this tide?
Firstly, South Africa needs to admit it has a problem. On this score, some progress has been made, with Gordhan insisting that there is full appreciation within government of the current “crisis” facing the country.
The next step is as tricky, as reigniting growth depends largely on forces outside of government control. It hinges primarily on private-sector investment, while ensuring that government’s own actions do not further impede growth. Arguably, the intricate approach that Gordhan has adopted to raising new revenue reflects his sensitivity to this latter point, as major new tax hikes could have placed further downward pressure on growth.
Gordhan admits that the country has not yet “cracked the code” for stimulating higher levels of inclusive and job-rich growth, while indicating that rebuilding relations with business is critical to reversing the underperformance.
It appears that progress is also being made in winning support from business for a “new growth model”, with government and big business having become far closer since ‘Nenegate’. It will be essential, though, to ensure that labour does not feel left out – progress in this area will prove challenging, however, particularly in light of the fracturing of the labour movement over the past few years.
What does this all mean? The Budget alone may still fall short in ensuring that we stave off a downgrade to ‘junk’. However, it is possible that a comprehensive, and well communicated, package – comprising the Budget, a political commitment to probity and a growth pact supported by business and labour – could well do the trick.