What credit ratings agencies and investors don’t want to see is short-term cyclical cash overcollections being tied into permanent commitments. With so many urgent demands on the public purse this may prove a tempting option, but over time that could blow the country out of the debt trajectory set by his predecessor, Tito Mboweni, which Godongwana stuck to in October.
The trajectory sees the government’s consolidated deficit reaching 7.8% of GDP in Wednesday’s budget, down from February’s forecast of 9.3%, and it is expected to decline to 4.9% of GDP by 2024/2025. Similarly, the gross loan debt-to-GDP ratio is expected to reach 69.9% in 2021/2022, and to rise to 78.1% in 2025/2026, well down from February’s forecast of 81.9% in 2021/2022 and a peak in 2025/2026 of 88.9%.
Both of those indicators are closely watched by ratings agencies, and Godongwana needs to display that same strong commitment to fiscal discipline on Wednesday to ensure the government can fund its borrowing needs at reasonable interest rates. Wider government spending demands as well as bond redemptions are looming in the years ahead, which means the fiscal framework remains stressed beyond the short-term boon from minerals prices.
However, if Godongwana were to accelerate the time frame from when the debt to GDP ratio starts to fall, it would provide a huge boost to confidence, locally and globally, in the SA fiscal and economic recovery story.
The upturn in the mining sector’s fortunes, which is providing the minister with the extra cash, could not have been more timely given the dire state of the economy, but should also serve as a strong reminder to the government of how damaging to the economy policy uncertainty can be.
The mining sector particularly has long been plagued by policy uncertainty, which peaked during the tenure of now disgraced former mineral resources & energy minister Mosebenzi Zwane, and saw SA failing to capitalise fully on the strong commodities bull run from 2009. Instead, our mining production figures remained flat. Imagine how much more we would have benefited if polices were more conducive to miners investing in new SA mines.
The most important element to pull SA’s credit ratings out of junk status and back into investment-grade ratings is fiscal consolidation. Then we need catalysts to economic growth to kick in, such as a successful rollout of the R1-trillion infrastructure programme. The economy will receive further stimulus as each of the numerous reforms that are planned or in process finally kick in.
Economic expansion combined with fiscal discipline is key to regaining a budget surplus, which we last had for a full year in 2008/2009. That means we have been spending more than we have been earning for 12 years and have had to borrow the difference. On average, economists say, it takes seven years for a country to move out of subinvestment grade credit ratings, but we have only been pursuing this goal realistically since 2018.
Once expenditure drops below revenue, SA will be in a position to better address the country’s broad social needs — including education and health as well as more financial support for those in need.
I’m confident the minister will keep us on that path by withstanding the inevitable pressures on expenditure. He has repeatedly highlighted the likely short-term nature of the commodities boom and stated that fiscal consolidation would be sustained to reduce the budget deficit and stabilise the national debt.
I extend my best wishes to Godongwana for his maiden budget. The pressures on him are unique and immense.
• Mavuso is CEO of Business Leadership SA. This article first appeared in Business Day.