Transcript and audio of the presentation by Biznews.com editor Alec Hogg to clients of Grant Thornton at the iconic Moses Mabhida stadium in Durban. It was at a packed breakfast meeting on February 25th, the morning after SA Finance Minister Pravin Gordhan’s 2016 Budget Speech.
By Alec Hogg
This Budget reflects that Pravin Gordhan is a politician, but he’s also an activist of considerable integrity.
I had the opportunity yesterday morning of going through the information long before everybody else did. That’s what happens on Budget Day in what Treasury calls the lockup. Part of the process is spending an hour listening and questioning with 120 other journalists – probably the biggest press corps that we’ve seen at a Budget presentation – questioning the Minister of Finance, his Director-General, the Deputy Minister, and the Reserve Bank Governor…all very able people.
In the speech itself, the Finance Minister said numerous times in his speech, “We are resilient. We are committed. We are resourceful.” But for me the hashtag for this Budget is “no win for spin”.
2016 Budget Key Highlights:
It offers a lot of spin as we alway us anticipate, because Pravin Gordhan is a politician and because he’s a politician he has been given the most difficult task that you could imagine. Especially given the last seven years of easy money around the world and economic mismanagement in South Africa.
It’s not inconceivable that the New South Africa can run a budget surplus. We did so in 2007. It’s not inconceivable that this country’s credit has an investment grade rating. We achieved that for the first time in the year 2000. The democratic government achieved something many thought impossible. But it is now struggling to retain the investment grade rating.
To achieve this, Pravin Gordhan, remember he’s only been in his old office for less than three months, had to do two big things in the 2016 Budget.
He had to try and find a way of growing the economy. In October, the International Monetary Fund put a figure on economic growth for South Africa, at 1.3 percent. We had Nenegate on the 9th of December. The R500bn lost in the two days that followed are accounted for through the R270bn that was wiped off the value of financial and property shares on the JSE, and R250bn in capital value wiped off South African bonds whose yield shot up from 8.5% to 10.3%.
Some of that has been clawed back. But still over half of the losses remain in what is now known internationally as the ‘Zuma discount’. SA bonds are trading at one percentage point higher than prior to Nenegate, and currency costs more than R1 more against the US Dollar.
Those are premiums that have been worked been into the system, are now permanent. The long-term cost of President Jacob Zuma’s Nenegate blunder. They are premiums foreign investors now demand because they believe there could be a repeat performance.
It’s worth recalling, too, that Pravin Gordhan went into the Budget this year having been told by his President that he’s not the best suited for the position. To his eternal credit, Gordhan kept calm and focused on the two big issues.
On the one hand, how do you promote growth? On the other, how do you get the ratings agencies to reverse their view and hold off from dropping SA’s investment grade status?
As we are well aware after the Budget speech and the details provided, Government is now paying almost R150bn just to service its outstanding debt. One-third of South Africa’s funding comes from abroad. That funding will cost an inordinate amount more if the country loses its investment grade rating.
That is a task looks even tougher after the speech. Yesterday morning the Rand traded at R15.20 to the US Dollar. After Pravin’s speech had been broadcast, the Rand had fallen to R15.70, losing a hefty 50 cents. Similarly, bonds weakened by more than 20 basis points.
What is this telling you? Did our Finance Minister fail? Did he present something that once again, has got the markets jittery?
In reality, not so.
Read also: Pravin Gordhan’s #Budget2016 in a nutshell
Mr Market is a manic-depressive. One day, he wakes up excited and the next day is depressed. That’s why we get such volatility in asset prices.
Mr Market was anticipating the impossible because, remember, Pravin Gordhan is a politician. A very good politician. This budget and his Speech were extremely well crafted. And about as positive as any South African could have hoped for.
South Africa has been overspending for the past seven years. And then we had Nenegate. That is not a newsflash. In Davos, the International Monetary Fund reduced its GDP growth rate forecast for SA from 1.3 percent to 0.7 percent. That this sharp decline comes at a time the the rest of the world is recovering is another illustration of what Nenegate cost this country.
Just 0.7% growth – Pravin’s forecast is a tad higher at 0.9% – at a time when the new policies introduced by a market and business friendly Government in India has raised its base growth rate of 7.5% GDP growth tells you something more.
The ANC understands what is needed in this country to grow at that same 7.5%. The only problem is what is required to follow the Indian example is politically unpalatable. That will come in time, though. It must.
Back to the Budget tightrope, to begin with, SA’s Finance Minister required to introduce austerity but without describing it that way.
Why? Government spending has been growing and, worse, the value for money Government receives has been declining. The personnel in the public sector has been expanding at a rate that is simply unaffordable. Pressures on revenue/on taxes are growing.
Business has lost confidence and is at an all-time low – not just as shown in surveys. Corporate balance sheets have record amounts of cash in them – more than R500bn. It tells you that the confidence to reinvest in this country does not exist.
Corruption is rampant. Crony capitalism and tenderpreneurs have become part of our vocabulary.
As a Finance Minister, you need to look at these things and either say, “It’s not happening. It’s just a figment of the media’s imagination” or “something that’s coming from the FBI, the CIA, the White House or whomever it is that Gwede Mantashe is trying to blame. Or admit that this is the reality? Is what we talk about around our dinner tables true?
The Finance Minister is no pessimist. The last Budget Pravin Gordhan presented was in 2014. He forecast economic growth of 2.7%. It came out at 1.5%. As a result, his projected Budget deficit was also understated. But Gordhan cannot take blame because when he called for less spending, he was fired and sent off to a junior portfolio.
Less than a decade ago Government debt was 26 percent of GDP. It’s now nearly 50 percent. And we have bloated State-owned enterprises that account for almost R800bn of that, and keep needing more bailing out – almost R30bn alone for Eskom and SAA in 2015.
These are issues that, remember, the only recently Finance Minister had to deal with.
How did he address it in the speech yesterday?
Read also: Pravin Gordhan’s key #Budget2016 messages
Firstly, he found some way to ensure that Government spending in the next three years will be between three percentage points and 1.5 percentage points less than what it gets in.
It’s like looking at your own household budget and saying, “How are we going to reduce the money we have to borrow?” As a developing country, SA has to borrow. Developing countries don;t have enough resources of their own so have top borrow money for the economy can grow.
Pravin Gordhan has budgeted for a sharp reduction in the Budget deficit, to a figure that would easily qualify this country as part of the European Union, which has some of the strictest budget requirements in the world. That’s quite some achievement – especially to do so without a revolution within your own ranks.
He’s also managed to switch priorities within the spending of Government. R16bn: that’s nearly one percentage point brought in through on VAT annually, is being switched – additionally – into higher education.
Where is that R16bn coming from? That was my question to the team in the lockup Press Conference yesterday. The Treasury DG Lungisa Fuzile pointed me to a page in the copious documentation which, in essence, says, public sector job posts will be frozen. In many parts of the country there is now agreed there will be no growth in Government personnel.
New people are not being hired. Some provinces and departments have They’ve frozen what they call the ‘Persal’ system – put in a block so no new names can be added.
As important, the “toenadering” (getting closer) business and Government is unprecedented. In the last month, there have been at least four meetings between 60 CEO’s and top members of Government.
Why? It’s because economies do not grow without the private sector. Only the private sector creates growth. Somewhere, somehow, South Africa has this warped belief that Government creates growth.
Governments absorb taxes. They are a ‘dead hand’ on the economy. They’re a facilitator, at best. Growth has to be generated through entrepreneurship, through businesses. This audience of course, doesn’t need reminding of that. Within Government however, that reminder is now coming through very strongly.
In his previous incarnation as Finance Minister, one of the most aggressive moves that Pravin Gordhan made was the appointment of a Procurement Czar to oversee the tender process – to attack tenderpreneurs.
The Chief Procurement Office now oversees the R500bn per year that Government spends on procurement. One of the ugly truths of South Africa is how little very poor value for money taxpayers receive on that money. The Procurement Czar is someone who will now have the obligation to not only assess every contract over R10m entered into by any branch of the public sector.
On top of that, the eProcurement Portal kicks off on the 1st of April. This portal will bring transparency for the first time to all Government contracts.
Pravin Gordhan understands what is really happening. He has also charged the Procurement Czar with saving five percent per year on State procurement. That is R25bn a year taxpayers are not getting value for money for. It is Budgeted as part of his mandate for the next three years.
There’s also the offshore amnesty for South Africans who took money out of the country illegally. Prof Matthew Lester, a member of the Davis Tax Commission, says the previous amnesty brought in tax of R7bn. He believes the latest one could be bigger because many of those who took money out illegally pout the funds into trusts which are only now being exposed through international actions.
On the amnesty, Gordhan said that it is the last opportunity for a group of people who politically are not the strongest, to put it mildly. He also said that we’re not hitting millionaires yet so I guess his anticipation is that there will be lots of money coming back to South Africa as a consequence of this, and then we don’t have to bring in wealth taxes.
The bloated State-owned enterprises are also being addressed. In his press conference yesterday he said, “The word ‘bailout’ has to be removed from our vocabulary.” R30bn alone in the last year that went to bail out two State-owned enterprises last year.
The most obvious of these…the sorest of these thumbs…is the one run by the lady who did not have President Zuma’s love child (as the Presidency told us), South African Airways is the first step. South African Airways’ board is being replaced within the next few weeks, which is the beginning of the changes.
The Finance Minister says that without replacing the board, you can’t do the rest and the rest will include the obvious things like why the State has four different airlines. Once you see these moves, it will send the kind of message that one needs in the business community because the business community remains skeptical, for very good reason.
Those 60 CEO’s who’ve been along to the meetings and have had close engagement with the Finance Minister, who’ve indeed even put together working groups…one of them is working on ‘how do we protect our ratings from not declining into junk status’. There’s a working group on this but unprecedented is the fact that the members of the working group, which are people from Treasury and leading businessmen are doing a joint roadshow around the world and to ratings agencies to protect it. That’s unprecedented for South Africa. Another one of their working groups is on how to help small and medium enterprises.
Many of these CEO’s have said they would like to personally be involved in mentorship programs and help others learn how to run businesses. For some of us, it’s in our DNA. It’s in our genes. We understand how to run a successful business because that’s what we learned around the dinner table growing up. For others in South Africa, this is a whole new area so mentorship is something, which has been forgotten in the past and something that’s being absorbed now by this business group.
The third of the working groups between Treasury and the business community is how to analyse opportunities for business to invest in South Africa. Co-invest, we’ve heard on their State-owned enterprises.
Minority stakes in some of the State-owned enterprises. These are actions that politically, are totally unpalatable. Mention the word ‘privatisation’ and we’ll have a strike tomorrow but talk about co-investing, public/private partnerships, and greater involvement and it becomes more palatable.
Remember, Pravin Gordhan is a politician and a masterful one, at that.
In yesterday’s speech – just to give you a background of some of the challenges that he faces – he mentioned President Zuma six times. It was almost in passing. In the 2014 speech before he was fired, there were 12 mentions. ‘Mr President – this. Mr President, as you said’.
It can give you an understanding that the warmth that might have existed in 2014 is not quite at the same level today. It’s very well known that President Jacob Zuma was forced to reappoint Pravin Gordhan. Had we not had Nenegate consequences of his decision to appoint Des van Rooyen and his two advisors (one of whom is the son-in-law of another member of the ANC Top 6) who arrived at the Treasury to tell the guys who look after the country’s money that they would now be taking the decisions and signing the cheques – which is why people at the Treasury called this “9/12” (9 December) after the US’s 9/11.
Read also: Named: Van Rooyen’s two Gupta “advisors” who almost hijacked SA treasury
For the Treasury, this was on the scale of 9/11. The Treasury had been hijacked. Two days before the Budget Speech, President Zuma says that the man who nearly hijacked the Treasury was the finest Finance Minister he’d appointed.
You have to wonder why Zuma should say that to a man who spent five years in the post guiding the country through the most difficult period possible. Prior to that, Gordhan spent ten years turning around SARS into an efficient machine, which was dismantled after he was fired. And in the last two years, he’s had the great benefit of going to the real festering sore of South Africa’s public sector, which is municipalities.
Could we have had a better qualified individual to sort out the financial mess in South Africa? I doubt it and certainly do not believe a guy with a few certificates who was a mayor in a town where he was chased out by the residents on fear of death is better. Certainly not one perviously so invisible in Parliament that Trevor Manuel asked If he is this rising star, why in six years of serving in Parliament together , did I not know what he looked like?
It gives you an indication of the relationship between Pravin Gordhan and his boss and reminds us that Pravin Gordhan is a politician. In the lockup, he was asked, “What makes you think that you could do more than you did in 2014 – much more – and actually keep your job? What makes you think that you’ve got the political capital to do it?” He said, “Well, we’ll only know by October because in October, the mini-Budget will be presented and if I’m sitting here in October then you’ll know I’ve got the political capital to achieve these things. If not, then we have the answer.”
Peter Attard Montalto is the emerging market specialist at Nomura Bank in London. Nomura is a Japanese company.
I talk to him often because he’s one of the few international analysts who focuses a lot of attention on South Africa. He visits here a great deal and he has the benefit of independence of sitting at the other end of the world and being able to talk freely.
Montalto says the reason why the markets reacted the way that they did yesterday and indeed, why he was disappointed was that Pravin Gordhan ‘pulled no rabbits out of the hat’. The international community was expecting rabbits to be pulled out of the hat – something sensational.
The ANC knows what needs to be done as did Madura and Chavez in Venezuela. But politically, they didn’t want to do that in Venezuela because it was unpalatable.
The Argentinians: what happened there with the Mauricio Macri’s new government taking over…they were voted into power because they knew what needed to be done and so did the population of that country.
Pravin Gordhan knows what needs to be done. The ruling party in this country knows what needs to be done, but it needs to be done in a South African way. We need to do things differently because of our history and if you see the context of yesterday’s Budget through that lens, I think you’ll probably agree with me that what was achieved was quite special.
Austerity is happening. Even if it cannot be named as such. The growth in Government spending will be less than the growth of what it’s getting in. That is unprecedented since the Budget surplus in 2007.
I would remind you: Pravin wants us to think about his comments – that we are resilient, we are committed, and we are resourceful. I would remind you rather to remember that Pravin Gordhan is a politician and without being a politician and without playing the political game, he can’t do any of this country or us any good.
Thank you.
2016 Budget Speech:
