SA economy falls short of Government forecasts – Dawie Roodt

Finance Minister Enoch Godongwana presented his medium-term budget in Parliament, revealing that disappointing tax revenues and rising costs to service the debt have taken a toll on government finances. Godongwana’s predictions include a slower-than-anticipated economic growth of 0.8% compared to his February budget projections, accompanied by a substantial increase of R54.7 billion in the main budget deficit. These forecasts according to Dawie Roodt, the Chief Economist at the Efficient Group, are far too optimistic. In an interview with Biznews, Roodt said he did not believe the projected growth would materialise and that several items are not included in the deficit numbers. The finance minister’s overall picture, he said, is not as rosy as the minister is portraying it. It is significantly worse. Roodt also believes that Transnet will have to be bailed out. Without it, he said, the economy is not going to function. Roodt estimates that the fiscal deficit is closer to 6.6% if Eskom’s debt is considered. Cutting the size of the state sector, he regarded it as good news and suggested the government start with VIP Protection expenses. The real picture of the economy, he said, will emerge in the main budget in February 2024. Roodt also said the picture that Mr Godongwana painted of himself as Mr Austerity does not hold water; he is Mr Expenditure. – Linda van Tilburg

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Relevant timestamps from the interview

  • 00:08 – Introductions
  • 00:50 – Dawie Roodt’s overall impression of the mid-term budget speech
  • 03:21 – His estimates of what it should be
  • 04:39 – Reconfiguration of the and the structure and size of the state
  • 07:34 – how have the markets reacted to the budget
  • 09:01 – Prepare for February
  • 10:31 – Surprise at the GDP to debt ratio
  • 11:57 – Grants
  • 12:56 – What he thinks of the new mechanism announced to fund large infrastructure projects
  • 15:24 – Mr Expenditure not Mr Austerity
  • 17:38 – Privatisation
  • 17:57 – How this affects the Election next year
  • 19:56 – Conclusions

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Excerpts from the Interview

Finance Minister is far too optimistic, Transnet will get money

My overall impression is that the Minister is far too optimistic. He’s talking about economic growth of 1.8%, for example, when it’s more like 0.8%. I don’t think we’re going to see that. And for subsequent years, you also see economic growth growing close to about 2% in two or three years. I don’t think that’s going to happen.

Something else that I’m actually quite much more concerned about than this is not something new. It started happening in February already, and that is why I am not convinced that I should believe the fiscal deficit and the fiscal debt numbers, for example, because there are several items not included in the deficit numbers, which he also did not include in a February budget, like, for example, the transfer of R200 to 56 billion to Transnet to Eskom. Now that is supposed to be included in the fiscal deficit, and it is definitely supposed to be included in the fiscal debt numbers going forward, and it’s just not there.

The IMF pointed that out, and still, he did not include that in his estimates. Now, in addition to that, we know that the local authorities are in very deep trouble, and the local authorities, you did say that you can write off, to use these words, about R20 billion of their debt if they do A, B, and C, and that’s also not included in the deficit or the debt numbers, anyway. The same goes for Transnet. He said Transnet is not going to get money.

We will make some sort of plan; we will cross that bridge when we get there next year, but Transnet is going to get money because, without Transnet, this economy is not going to work, and it doesn’t matter what conditions he puts on the table; he will give money to Transnet because we simply cannot afford Transnet not to work. None of those numbers are included in the deficit or the debt numbers either. So all in all, I think the numbers, the actual numbers, the way that the Reserve Bank hopefully is going to report, will be completely different than what the Minister of Finance is giving us today. So, too optimistic in my way, and secondly, a bit economical with the actual economic numbers.

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Fiscal deficit is closer to 6.6%

My rough calculation is for a fiscal deficit in the current financial year of approximately 6.6%. That is what I’ve calculated. Now he’s got it at 4.9% if I remember correctly, let’s call it 5%, so it’s not that far off, but it’s still far off. But if you convert that to a debt-to-GDP ratio, there’s a bit of a technicality here. For example, if you want to take over ESKOM’s debt, do you simply move ESKOM’s debt from ESKOM’s balance sheet to your balance sheet, or do you put it into the fiscal deficit first before you put it into your debt numbers? If you put it into the fiscal deficit first, then you’re going to distort your fiscal deficit numbers over time.

But if you don’t put it via the fiscal deficit first and then into the debt numbers, you’re going to distort the debt numbers in any event. So there’s an argument that it should not be included in the deficit numbers and should simply be directly moved onto the balance sheet of the Minister of Finance. But the interest component of that debt, without a doubt, must be included in the deficit numbers. So something is wrong. Either the debt is wrong, or the deficit is wrong, or both could be wrong, or whatever, but the way that the Minister of Finance is reporting on those is simply incorrect.

Cutting the size and structure of the state –  Start with VIP protection  

That is the part of the good news, as far as I’m concerned, the best news that I’ve heard in the speech of the Minister of Finance, and that they’re talking about consolidation, and hopefully that will mean getting rid of many of the state departments. Remember, the confidence in the South African economy and the South African government is rock bottom. It’s never been this low. So we need some sort of symbolic gesture from the state that they are serious about cutting down on all these excesses that are being spent on political leaders, that they want to stop doing that. And I think a good symbolic gesture would be for the Minister of Finance to stop these VIP protection expenses, for example, which run into the billions of rands. So that’s not going to make a big difference, let’s be honest about that. The big difference is going to happen when you start cutting and cancelling some of the departments or consolidating many departments and getting rid of a lot of ministers and an army of deputy ministers. And that’s what we need. That needs to happen as well.

And I think some of that at least is going to happen. The big challenge for the Minister of Finance, of course, is that there’s an election around the corner, and you can’t cut back on state spending just before an election.

Taxes will have to be increased in the 2024 budget

I won’t be surprised if there are some tax hikes. I know he did say that he’s not considering tax increases, but remember, it’s possible to increase taxes without explicitly raising tax rates. For instance, in the case of personal income taxes, you just have to do nothing, and then bracket creep will naturally move you into higher tax brackets. That’s effectively a tax increase. So, I suspect that’s the kind of manoeuvre the Minister of Finance might employ because an actual tax increase or a significant cutback on tax expenditure just before an election is political suicide.

A VAT increase is the only option that can generate significant additional revenue. A 1% increase in VAT would yield between 25 and 30 billion rand for a full financial year. So, we’d likely need approximately a 2% increase in VAT. However, VAT is politically highly sensitive due to its regressive nature. But other tax options are limited. Company taxes can’t be raised, and personal income taxes are already quite high, as is the case with company taxes. In fact, we need to reduce company taxes in South Africa. Additionally, our wealthier citizens are leaving the country, emigrating, and taking their money, skills, and taxes with them. So, we can’t increase taxes on the so-called rich anymore. They are essentially the only remaining taxpayers in South Africa.

Rand appreciated because not much happened 

Looking at the financial markets,  the rand appreciated by something like 20 cents against the US dollar. It’s currently trading at 18.56 to the US dollar, and the bond market also appreciated quite nicely. I think we have to remember when you talk about the financial markets that the rand is always undervalued, but recently it has been more undervalued than usual. So, it’s well away from its supposed historic chain value.

If nothing happens, the rand tends to sort of gradually drift a little bit better. So, the very good news for South Africa is that nothing happens because that will support the rand and nudge the rand more towards its historic trend levels. Now I think the rand certainly did appreciate after what happened today, and I think part of the reason is that not much happened. Everybody’s been talking about these doom and gloom scenarios and the concerns about debt levels getting out of hand, and we do have to be concerned, of course, but the Minister of Finance sort of brushed over that and didn’t spend too much time on it. I think the financial markets said, ‘Oh, maybe it’s not that bad. Let’s wait and see what’s going to happen in February. So, I guess that’s part of the reason why the rand appreciated against the US dollar.

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Real picture will emerge in February 2024

This is only a medium-term statement, and then the actual hard work is going to happen in February. He will have to provide us with a lot of answers regarding what’s going to happen in February. He must inform us about the fate of local authorities because they are running out of money.

He mentioned that they are running out of Rmoney because people are generating their own electricity, so they don’t sell electricity to people anymore. So, what are we going to do with the local authorities? That’s a question. Somehow, we have to support the local authorities because if we don’t do that, they’re going to go bust. Many of them are already struggling. We have to address the issue of Transnet. He must give us an answer about Transnet. He can’t just tell us there will be conditions attached to the money he’s going to allocate to Transnet or Eskom, and that they need to meet criteria A, B, and C, or start paying interest on it. That doesn’t mean much because we cannot function without Transnet and Eskom. We have to provide funding to them, regardless of their compliance with conditions. He needs to clarify where the funding will come from.

As I mentioned earlier, if you consider all these figures, the overall picture is not as rosy as the Minister of Finance is trying to portray it. It’s significantly worse than what he’s presenting.

Finance Minister is telling colleagues to stop buying fancy cars 

I think the Minister of Finance, by actually putting it in the public domain and emphasising it in this, and then including it in the documents and highlighting it for the politicians, I believe the point he wants to make, which is correct, is that he wants to show his colleagues that we are in deep trouble. Stop buying fancy cars and houses; we can’t afford that. So, I was not surprised about that; we’ve known about it for a long time. South Africa’s debt and even the interest on the debt aren’t the main problems here. It’s the rate at which it’s changing, increasing at an alarming rate.

The minister mentioned that debt will stabilise at around 77% of GDP in a year. I don’t think so. I certainly don’t think so. If you look at what the minister said in the February budget, what he said in last year’s medium-term budget, and last year’s budget, you’ll see that every time, the deficit and the debt numbers far exceeded these estimates. So I expect the same will happen this time around. Next year, he’s going to tell us that it’s going to stabilise at 80% of GDP in two years, or something like that. So these estimates of the minister keep slipping.

Finance Minister is not Mr Austerity, he’s Mr Expenditure 

No, he’s Mr. Expenditure. He’s not Mr. Austerity. What is an austere budget? An austere budget is where you’re cutting back on state spending and squeezing your budget to avoid falling deeper into trouble. An austere budget matches state expenditure with revenue, at the very least. But no, we’re nowhere near that.

We have a fiscal deficit, and not just a small one, we have a massive fiscal deficit. So as long as the debt levels keep rising, we don’t have an austere budget; we have a highly expansionary budget in South Africa. This is far from austere; it’s incredibly expansionary. True austerity involves cutting back on state spending and reducing the fiscal deficit, not just talking about it. What’s happened in practice is that the fiscal deficit has increased. You can’t label that as a budget, certainly not.

A significant challenge for the Minister of Finance is how he’ll convince his colleagues to cut back on state spending when there’s an election looming. Many of the individuals in the cabinet, not only at the national government level but also in parliament, local authorities, and on the provincial level, along with state-owned enterprises, many of them are there due to political connections rather than merit. So, if the ANC loses elections, it’s likely that many people will lose their jobs, and they may struggle to find employment in the private sector because they lack the necessary qualifications.

February budget is going to be tough

The Minister of Finance, a few months ago, came out all guns blazing, telling his cabinet colleagues that he had to cut back on state spending. But next thing, he backtracked quite a bit in the newspapers, and everyone said, ‘No, that’s not what he meant,’ and all that. He was heavily criticised for that statement because it scared everyone, especially organised labour in South Africa. Organised labour made it very clear that they wouldn’t accept real cuts in state expenditure, for example. So no, his colleagues are going to resist this, and that’s primarily because of the upcoming election.

The February budget is going to be very tough, another very tough one for the Minister of Finance. That’s the one that matters. Now we want real numbers, and he’ll have to make decisions then because the election is probably going to be around March, May, or somewhere there, and the February budget precedes that. So, this is going to be a real crunch time for the Minister of Finance. 

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South Africa is transitioning to be less dependent on the state

We are probably going to see on the side of the state that they will become more realistic about the expectations of the private sector and more realistic in terms of these various contracts. I mean, who’s going to be completely crazy if they want to waste their shareholders’ money on only two-year contracts, running a railroad, for example? You need a long-term contract to do this. But there’s a lot of detail that needs to be ironed out before these kinds of agreements can be put in place. I think eventually, it’s a good idea, and it will be put in place eventually. If it’s not, in many instances, the private sector is simply doing it without the permission of the state.

I think electricity is a good example. The private sector is generating its electricity, and you don’t need the state’s permission to do that. What often happens, and it’s a problem for the local authorities, is that because the local authorities are not paying ESKOM, they owe ESKOM something like R60 billion. 

So, what happens is that ESKOM cuts off the electricity, and businesses that have paid for the electricity usage to the municipalities get very angry. They go to court and start buying electricity directly from ESKOM. So the local authorities can’t collect that electricity surcharge anymore, or they invest in their solar systems. South Africa is in a transition period where we’re becoming less dependent on the state for the provision of many things that the state used to provide to the economy. Electricity is just one example, but the same applies to post offices, railroads, and many other services.

I think Winston Churchill once said about the Americans, he said you can always expect the Americans to do the right thing after they’ve exhausted all the alternatives. And that is what’s going to happen in South Africa as well. The alternatives, we have to privatise because the state can’t do that. We are privatising things, not because we want to, and certainly not because it’s government policy, but because that is the only thing left to do. 

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