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How he stabilises our national debt burden in the mini budget is the burning question, writes Thabi Leoka
When former finance minister Nhlanhla Nene was unceremoniously sacked on the evening of December 9 2015, a dark cloud fell over South Africa as one of the most sacrosanct government departments was finally usurped.
The usurpation was short-lived, but, since then, South Africans have been desensitised by the revolving door that has become the norm at the National Treasury.
Nene’s recent resignation caught the markets by surprise. The timing could not have been worse.
His resignation was announced shortly after the Federal Reserve hiked rates, a move which rattled emerging market currencies.
Emerging markets, such as South Africa, have recently seen increased currency volatility because of risk aversion as investors pull their investments out of risky countries to less risky ones such as the US.
Borrowing costs are expected to increase further in the US in December. This will most likely lead to further outflows in emerging markets.
On the day of Nene’s resignation, the International Monetary Fund cut its 2018 and 2019 global growth forecasts, placing more pressure on emerging markets – already facing tighter financial conditions and capital outflows.
The medium-term budget policy statement will be presented in Parliament on Wednesday.
It was expected that Nene would deliver the mini budget speech after reclaiming his throne, but then came his untimely resignation.
Tito Mboweni was promptly appointed the new finance minister on October 9.
His appointment was warmly received by the markets. The stronger rand and bond market were proof of this.
No other endorsement of Mboweni was as reassuring as the message from Mohamed El-Erian, the chief economic adviser at international financial services provider Allianz whose bestselling books include The Only Game in Town and When Markets Collide.
He lauded Mboweni for being “highly capable, smart and engaging”.
Mboweni is faced with several challenges. He is expected to implement the recently announced stimulus plan, which is projected to boost business confidence and stimulate growth and investment.
GDP growth has been lacklustre and Mboweni will probably announce weaker GDP growth at the mini budget speech, compared with the 1.5% GDP growth forecast for 2018 – announced during this year’s budget speech in February.
At the time, Treasury did not expect that the country would show negative growth in the first half of 2018.
On Wednesday, Mboweni will outline how President Cyril Ramaphosa’s stimulus package will be funded.
The official communication is that it will be funded through a reprioritisation of existing budgetary resources.
The reprioritisation is expected to accommodate the R400 billion infrastructure fund and the R50 billion that has been targeted for the agriculture, rural and township economies.
This means that on Wednesday, Mboweni will announce which Peter he is robbing to fund Paul, and what the implications will be for the economy.
Mboweni will have to implement these budgetary changes without breaching the expenditure ceiling – meant to keep expenditure under control and contain the budget deficit. However, he will be hard-pressed to stick to these spending limits.
The outcome of the three-year public sector wage negotiations was R30 billion more than budgeted for over the medium-term expenditure framework, covering the fiscal years 2018/19 to 2020/21.
This, along with the precarious financial positions in which state-owned entities (SOEs) find themselves, should make Mboweni very nervous.
Government guarantees to SOEs currently sit at an estimated R430 billion.
Sluggish economic growth in recent years has contributed to a deterioration of the fiscal balance and a corresponding increase in government debt relative to GDP.
The profitability of SOEs has declined and National Treasury has played a key role in helping to keep these entities afloat, not only through issuing guarantees, but also through loans, subsidies and equity injections.
While such guarantees enable SOEs to access funding that would otherwise be unavailable or to borrow at a lower cost, they also create significant risks to government because high levels of contingent liabilities constitute a major risk to state finances.
Contingent liabilities may become a drag to fiscal policy, and their long-term accumulation can jeopardise debt sustainability.
Mboweni is expected to ensure that any intervention to support SOEs is deficit neutral, and that companies that receive government support have sound business plans, demonstrating solid governance and clear plans on addressing operational inefficiencies.
A slight narrowing of the budget deficit is likely. Fiscal slippages could be contained by further cost-containment measures.
Shrinking the government will be a contentious issue, even though the president has announced his intention of having a smaller, more efficient government. Mboweni will probably announce job freezes instead.
Ratings agencies are descending on South Africa in November for their last review of the year. Only Moody’s rates the country above investment grade.
Moody’s has said that South Africa could see its credit rating upgraded if it successfully implements structural reforms that will raise economic growth and stabilise the nation’s debt burden.
Mboweni knows exactly what needs to be done, but, for now, he may have to launch a charm offensive as he settles into his new position.
Regarded by many as dependable and sturdy, he is expected to bring stability to Treasury.
Some may continue to wonder why Mboweni, who last held a ministerial post during Nelson Mandela’s presidency, is back as a minister 20 years later, but given the current state of the economy, we cannot afford to be experimental.
It remains to be seen whether Ramaphosa will keep Mboweni as finance minister beyond the 2019 elections, but South Africa can ill afford to have a sixth finance minister in four years.
Replacing Mboweni would be chancy. It would be ideal if South Africa had a young and smart new finance minister, but not yet. The timing is not ideal.
Mboweni is almost 60 years old, but he is not the nduna that he used to be in his 40s as the then SA Reserve Bank governor.
He is actually quite woke and lit, yet mature enough to know not to quote US rapper Kendrick Lamar when delivering his budget speech in Parliament.
Leoka is an economist affiliated to two organisations. She was named economist of the year in 2017
