Staving off a downgrade to junk has emerged as the undisputed priority for government ahead of the 2016 Budget speech. There is, at last, an acute appreciation that the country’s serious loss of institutional credibility – following the calamitous events of December, together with a material slippage in South Africa’s growth, inflation and fiscal outlook since the October mini Budget – has taken the country to the brink.
There is also a growing appreciation that a downgrade would have devastating short- and long-term consequences for an already flailing economy – one that has a strong dependence on portfolio and direct investments and also has far higher debt levels than was the case prior to the 2008 financial crisis and 2009 recession.
Grasping the precariousness of the situation following his recall to the position of Finance Minister, Pravin Gordhan seems to have moved swiftly to secure internal buy-in for a package of measures – some very painful – to avoid junk.
More importantly, though, Gordhan, and more recently President Jacob Zuma, have also sought to build credibility around the junk-avoidance strategy by galvanising private-sector support for the plan. In fact, one could even argue that, in the democratic era, business has never been in a more powerful position to influence policy.
This point was emphasised by Zuma himself during a meeting with business leaders in Cape Town last week, where he said: “We may not be in a position to change the past. However, we have the power to map the future.”
But what needs to be done to avoid being junked?
World Bank programme leader Catriona Purfield has argued for Budget “action” to address the fiscal constraints. “I think what we would be looking for is action on the spending side,” she explains.
Standard Bank economist Goolam Ballim took it a step further by quantifying the problem, estimating that government has a yearly funding gap of between R30-billion and R50-billion to close through a combination of expenditure cuts and tax hikes.
Describing February 24 as South Africa’s “date with destiny”, Ballim argues that there can be no further fiscal slippage, as measured by the debt-to-gross-domestic-product ratio remaining below 50% and limiting the fiscal deficit to 3% by the outer year of the three-year Budget framework.
To achieve fiscal balance will require “rigorous efforts” to restrain expenditure, Ballim argues, while pursuing a “pact with society” whereby part of the funding gap is closed through increased taxes.
The accord would be premised on securing “bridging finance” through a higher tax burden that averts a downgrade, which is made palatable by a promise that business will be integral to shaping the longer-term growth plan. This seems to be the essence of the agreement reached between government and business on February 9 in Cape Town, where there was support for uniting behind a cohesive narrative and plan.
How it will be sold to the rest of society and to the trade unions remains uncertain. Far more certain is that much energy is being given to ensuring that South Africa is not junked.
As summarised by Ballim: “Should we fail on February 24, then a downgrade to a subinvest- ment grade in June will be a certainty. However, if we do enough in February, it signals that an inflection point has been reached and a new course is being chartered.”