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Supplementary Budget may still be too optimistic on growth
July 2, 2020, 4:56 pm

Ramaphosa noted that a package of economic reforms that will improve productivity, lower costs and reduce demands of state-owned companies on the public purse [PREUSS]

The National Treasury forecasts that the economy will contract by 7.2 per cent in 2020, but that remains dependent on a rapid increase in take up of the bank loan guarantee fund of R200 billion, which is a massive 40 per cent of the R500 billion economic stimulus package.

As of June 13 , only 5 per cent of this fund had been taken up, so over what time period will the remaining 95 per cent be taken up? That is why several economists are looking at a contraction of 10 per cent or more this year.

That means that in 2023 the South African economy will still be 1.9 per cent less than it was in 2019. In per capita GDP terms this implies that the average South African will be 8 per cent poorer in 2023 than they were in 2019 as population growth is above 1.5 per cent per year.

In the past few years, the Treasury has been too optimistic in its GDP growth forecasts, which is why tax revenue has consistently been below target.

The Treasury has used the experience of the Global Financial Crisis to model what happened to tax revenues, but this seems to be too optimistic given that in 2009 the contraction was only 1.5 per cent compared with a 7.2 per cent collapse expected now.

As Treasury said in its Review: “Business confidence will remain near historic lows, and investment and employment will drop below last year’s levels. Household consumption will remain constrained by reduced income – from wages, commissions, bonuses and financial assets – as well as low job growth. The 2020 outlook may deteriorate further if the global economy continues to weaken, or economic activity is curtailed again to protect public health.”

It noted that it is primarily domestic fiscal policy measures and implementation of economic reforms over the next six to 12 months that will determine the growth trajectory over the next several years. These will be outlined in the 2020 Medium Term Budget Policy Statement (MTBPS) due in October.

As at June 23, South Africa has more than 106,000 coronavirus cases, but testing lags as testing by the public sector is supposed to be above 30 000 per day but at the moment only averages 14 000 per day, although more than 1 million tests from both private and public sectors have already been carried out.

The Treasury said that critical risks to the economy include continued volatility in global financial markets, sudden interruptions in capital inflows, the reliability of electricity supply, additional commitments to fund financially distressed state-owned companies, low levels of confidence, policy uncertainty and concerns about government’s commitment to the independence of the central bank.

Pandemic Borrowing

The South African government intends to borrow $7 billion from multilateral finance institutions for its pandemic response. This includes a US$1 billion loan from the BRICS New Development Bank, US$4.2 billion from the International Monetary Fund and US$1.8 billion from other unspecified sources.

Short-term borrowing will increase by R98 billion to R146 billion in 2020/21 and will average R60 billion over 2021/22 and 2022/23. Borrowing in the domestic bond market will increase by R124.8 billion in 2020/21 to R462.5 billion, and average R419.9 billion over the next two years.

It highlighted the risk of a debt spiral because if this spiral is not halted and reversed, it is likely that some state-owned companies and public entities will collapse, triggering a call on guaranteed debt obligations. Failure to substantially reduce costs, address longstanding governance failures, prosecute state-capture participants and undertake profound operational reforms has contributed to already unsustainable financial positions in many public-sector institutions.

The pressure on public finances requires fundamental changes to the manner in which government supports these institutions, and such reforms will be implemented in the near term.

That is why the only additional funds allocated to state-owned companies was R3 billion for the Land Bank.

The government envisions a package of economic reforms that will improve productivity, lower costs and reduce demands of state-owned companies on the public purse. These measures include finalising electricity determinations, unbundling Eskom and taking other steps to open up energy markets, modernising ports and rail infrastructure, and licensing spectrum.

Implementation of proposed reforms has however been lacking since Cyril Ramaphosa became president in February 2018. The rand and the Johannesburg Stock Exchange both ended the day weaker than on the previous day.

Helmo Preuss in Makhanda, South Africa for The BRICS Post

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