At the start of this year, our most pressing demand of the state was that it rein in its widening budget deficit and cut expenditure by having a real conversation with its employees and labour unions about wage growth that has been higher than the private sector over much of the past decade. It was a tall task, especially with a March ratings downgrade looming as a deadline of sorts for Treasury to get the job done.
Alas, it was a deadline not met and we slipped into “junk” status. A missed deadline that in normal times would serve as a sentence of years of operating in a sub-investment world with the challenges of a dramatically weaker currency and crippling borrowing costs. Yet, these have not been normal times since mid-March when the World Health Organisation declared Covid-19 a global pandemic.
Everything we thought we knew as we entered the third decade of this century no longer mattered. Economic models went out the window.
The capital outflows we expected in the aftermath of our credit ratings being downgraded to junk haven’t occurred, quite simply because the global investment community has not found many safe havens in this world except for gold.
From being urged to rein in spending, Treasury is now being called on to open up the spending taps. This will be needed, given the crippling effects to our economy from the lockdown. The 2% GDP contraction between January and March this year was actually better than expected, but is still SA’s longest recession since the global financial crisis. And we need to brace ourselves for much worse figures in the second and third quarters as we reach the peak of Covid-19 cases.
Under these conditions South Africa, like other states across the world, has to step forward with plans for a health response as well as one to stimulate the economy. Borrowings, for better or worse, are going to have to form a big part of that equation. Treasury is in talks with the International Monetary Fund but, given our history, there’s apprehension from Fitch Ratings of the state’s ability to stabilise debt levels. The credit ratings agency believes it’s “unlikely” to be achieved because of challenges in cutting expenditure, boosting growth and struggling state-owned enterprises such as Eskom and SAA. Planned expenditure cuts are seen as ambitious because of powerful trade unions and deep divisions within the governing ANC.
They certainly have our number there. The challenge is all the more testing when you consider that it’s set against a backdrop of an economy with very little to no demand, evident in inflation rates being at their lowest since 2005.
But we can’t resign ourselves to the worst.
We just simply can’t afford to fold our hands given how much we all expect this pandemic to pull at the fabric of our inequitable society. With case numbers rising in the Eastern Cape and Gauteng at alarming rates, it’s important that we do our best to ensure the least amount of lives are lost and that the economy holds a promise of a better tomorrow. This can be done only by strengthening the social compact between state, business and labour. The state and the players in our body politic need to appreciate that it’s not only them invested in this cause.
The vitality and growth of SA’s business sector is tied into the state’s response to the pandemic. By working together along with labour as partners, we can breathe confidence and hope as the pandemic is brought much closer to home for more of our citizens as cases and deaths continue to increase.
Fitch may be questioning the state’s ability to stabilise its debt levels, but it could be proved wrong. Relations between the state and business are nowhere near as dysfunctional as they were in the final years of the Jacob Zuma presidency. We must acknowledge that there now are much better channels of communication.
It’s through these channels that we now need to see South Africa unite and wage a war both on the health and economic fronts against Covid-19. There’s much we can do on together instead of working past each other. Infrastructure projects touted by National Treasury that speak to the basic needs of the country should be primed for private sector participation. With a limited fiscus, private sector participation is the only way we’ll get proposals off the pages and into the real nuts and bolts of the economy.
By the day, it looks like the R500bn stimulus injection quite simply won’t be enough to get the economy to recover in the months to come. Given our fiscal position it’s perhaps not surprising. To plug the funding gap, the state and in particular the governing party needn’t toy with the idea of prescribed assets: the private sector stands willing to invest in growth-enhancing projects alongside the state.
In some geographies across the world and in particular in emerging markets, the state is the only game in town. South Africa has an advantage in that there’s still a sizeable private sector, whose earnings are predominantly earned at home. It is as tied to the prospects of the country as the state. By working together, we can disprove the doubters of the South African story and provide hope to our desperate position.
This column was written by Busi Mavuso and was first published in Business Report.
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