Darkest before the dawn? - November 2019

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Marie Antelme

Marie Antelme

Marie joined Coronation in 2014 as an economist in the Fixed Interest investment unit. She has 21 years' experience as a market economist.

The Minister of Finance presented the 2019 Medium-Term Budget Policy Statement (MTBPS) to Parliament on Wednesday, 30 October. The news wasnt good, and markets responded accordingly.

It contained yet another material deterioration in both economic and fiscal metrics. Some of this deterioration had been expected, given the low rate of growth in 2019, revenue disappointments and the significant increase in bailouts for state-owned enterprises (SOEs).


The weak growth in 2019 provides little hope of an improvement in the economy. The sharp deterioration in fiscal metrics over several years is due to a number of factors. Broadly speaking, it is a combination of poor tax revenues (due to the weaker-than-expected nominal GDP growth and inefficiencies at the South African Revenue Service) and a failure to adjust expenditure accordingly.

With respect to the latter, this is mostly attributable the government’s expensive wage bill and its’ ongoing bailout funding for SOEs. There seems to be an apparent reluctance to moderate expenditure in these regards, which has led to expectations that the fiscal deficit will widen to -5.9% of GDP this year and a projected nadir of -6.5% next year.

The data over the projection period in the MTBPS shows further deterioration. Debt is expected to grow from 60.3% of GDP this year, to an alarming 70.3% in three years’ time. Along with this surge in debt, debt service costs remain the fastest growing expenditure item, and will rise from 3.9% of GDP this year to a projected 18% of revenue in 2022/23.

By Minister Mboweni’s opening remarks, this baseline reflects ‘minimal policy adjustments’, which means that the National Treasury has not factored remedial decisions into its forecasts. Specifically, there are two areas that need to be addressed in order to sustainably redirect the expenditure path:

  • The public sector wage bill, which swallows 38% of all allocated expenditure in historically generous wage settlement and employment practices, and which is growing 6.8% on average per annum.
  • Funding to failing parastatals. The front-loaded bailout of Eskom this year will cost taxpayers R49 billion and R56 billion in 2020.  The Minister allocated an additional R10 billion in 2022/23, bringing the total cash support to R33 billion for that period. The failure to embed a little fiscal discipline into the baseline is discouraging. Now is the time for the administration to make and act on some hard decisions.

Additionally, despite it not being in the baseline, Minister Mboweni posited a consolidation in expenditure, which could bring the country’s primary balance to zero in three years. This is a sensible target. Equally, the macroeconomic and buoyancy assumptions are now better aligned with reality, which should limit revenue disappointments going forward. 


On the critical issue of Eskom, the MTBTS provided few additional details. With the White Paper released just the day before, there was little scope for meaningful news, but, disappointingly, there was little evidence of the required sense of urgency.

What is clear is that Treasury is committed to enforcing the conditions it has placed on Eskom and that disbursements will be dependent on proof of reform progress with measurable deliverables. It’s not clear how this will work if it comes down to the wire – Eskom is unlikely to be denied default-saving assistance – but it is aware that funding is not unconditional.


A saving of R150 billion over the next three years is needed to achieve this primary balance in the medium-term. Necessary remedies include a comprehensive review of the public sector wage policy, including limiting living wage adjustments, automatic pay progression, bonuses and overtime costs.

Historically, any suggestion of curtailing public wages has been met with vociferous resistance. This time, however, our understanding is that there has been early, positive, engagement with unions on this matter. Nonetheless, implementation risk remains high, which is why National Treasury did not include any of these assumptions in their main forecasts.

In doing so, National Treasury has deferred any policy response to the Budget in 2020. It is to be hoped that, by then, a small improvement in growth and better recognition of and buy-in to fiscal challenges will enable the National Treasury to present an improved fiscal outlook. The fact remains that there is limited scope for improving the short-term financial position of the government, and long-term adjustments carry considerable, and concerning, implementation risk.


Unsurprisingly, given the degree of fiscal deterioration, Moody’s Investor Services downgraded their country outlook to ‘negative’ from ‘neutral’, while cautiously affirming the country’s sovereign rating at Baa3. However, the tone of the statement was sombre, with grave concerns raised about escalating levels of debt and stagnant growth. These are exacerbated by apparent unwillingness or inability by government and other stakeholders to implement the changes necessary to help improve growth and arrest the escalation in debt accumulation.  More alarmingly, the assessed country rating range, which lies at the heart of Moody’s assessment deteriorated, which lowers the bar for an actual downgrade should we fail to deliver. It will not be an easy road ahead.  We need strong and focused leadership to walk the nation back into firm territory.

During the 2019 Rugby World Cup, President Cyril Ramaphosa called on the Springboks for strong leadership and to show the country our power to achieve through unity. They delivered.

It is now time for government to do the same and deliver on the changes they have, so far, only promised.