Is South Africa heading for a fiscal crisis?

Maybe so, Sir, but not today

South Africa’s finances are in a dire state. We are spending too much, with too little coming in, meaning we have to borrow money. Such loans are becoming more expensive, which means we have to spend a larger portion of our income on interest, necessitating further loans. It seems like a classic spiral into a fiscal crisis.

The problem has quickly worsened. In February, Minister Enoch Godongwana announced that South Africa would need to borrow (just) R1.5 trillion (that’s 1.5 with eleven zeros). Krutham, an economic consultancy firm, calculated that this amount has increased to R1.9 trillion. There are several reasons for this. Load shedding [rolling blackouts] is worse than expected, dampening growth expectations and thus tax revenues. Additionally, attempts to fill the state coffers by increasing tax rates were unsuccessful; it caused tax revenue to decrease, indicating that South Africa is now on the wrong side of the Laffer curve. This means that further increases in tax rates will lead to even lower tax revenues. Simply put, there’s no more room to increase taxes.

If your income isn’t growing, you remain with only two options: either borrow more or make severe spending cuts. The latter is pivotal for any hope of success. Here’s the outlook from Roy Havemann, a former Treasury official and now CEO of Krutham: ‘Our starting point is that the Treasury will need to run a primary surplus for several years to counter the rising costs of government debt.’

Is such a thing even remotely possible? Maybe Pete ‘Maverick’ Mitchell can help.

Three decades after the first ‘Top Gun’, Maverick (Tom Cruise) receives a new assignment: train a new generation of elite pilots to destroy an underground uranium enrichment plant in a country that strongly reminds one of Russia. However, Maverick has to face his past when Bradley ‘Rooster’ Bradshaw, the son of his late best friend, is one of the new recruits. In an extremely dangerous mission, Maverick sacrifices his plane to save Rooster.

It’s a fun film, but it also has a storyline with lessons for South Africa: adaptability, teamwork, discipline, and courage are essential for success.

Adapting to unpredictable global trends is perhaps one of the most challenging tasks for a South African finance minister. The Covid-19 restrictions, the associated decline in international trade and tourism, and the decision to provide emergency grants to the poorest have put severe pressure on an already strained Treasury. Fortunately, the rise in mineral prices and the resulting tax windfall provided temporary relief for the state coffers. But after mineral prices returned to lower levels, and mining companies struggled to get their ore to the coast due to transport issues, this windfall became a thing of the past. We still pay grants – and Olive Shisana, the president’s special advisor on social policy, introduced a fantastical plan in September to extend them by nearly R80 billion. This suggests a government without the flexibility needed to navigate global economic trends.

It also doesn’t reflect good teamwork. A looming fiscal crisis can’t be solved by one department alone. It’s essential that the state has an overarching strategy, something currently lacking. There is little doubt that there’s disagreement on how to manage fiscal pressure between the Treasury, the Presidency (and its advisors), the Minister of Electricity, and other state departments. Moreover, this coordination should extend to the provinces and municipalities, requiring different political parties to collaborate. Just consider the City of Cape Town’s desire to control its trains.

A unanimously agreed-upon strategy is, of course, only as good as the discipline to implement it. Cutting expenditures will require strict control and monitoring, something, sadly, most departments are not known for. It will particularly require discipline to cut spending on politically sensitive items like social grants and wage adjustments. It may be easier, if short-sighted, to cut the budget on infrastructure spending; just look at what recently happened in Libya when critical infrastructure wasn’t maintained. Cutting your colleague’s (and your own) salary is much harder.

Taking such steps, of course, requires a good dose of courage. The steps to break up Eskom does not require consensus – an almost impossible goal given the various interests of different groups within the ANC – but it does require courage from the president. Moreover, with next year’s election promising to be the most competitive since 1994, it will take courage not to launch spending programs to win votes (see Shisana’s earlier-mentioned proposal).

With all these shortcomings, one almost wants to give up, just like when Maverick’s plane crashes into the mountains. But then there’s a turning point. Rooster turns around and searches for him despite the risk. And, without giving away too much of the story, the two find each other and also discover an old Russian fighter plane that gives them a chance to escape.

Is there an old fighter plane that Minister Godongwana can hijack?

Sort of. The good news is that Minister Godongwana still has a strong team of Treasury officials around him. They have identified the problems and are working on plans to address them. What might these plans be? In the short term, as Havemann notes, it’s about borrowing smarter. South Africa can potentially source additional debt from domestic banks, though their capacity is becoming increasingly stretched. The Government Employees Pension Fund (GEPF) remains a viable borrowing option, with the potential to adjust its allocation to government bonds to meet financing needs. Private pension funds and Eurobonds offer additional avenues, though the appetite from foreign investors for Eurobonds is currently lukewarm, and South Africa must weigh the risks and benefits of expanding issuance. All these strategies carry risks, but the alternative is worse.

But it’s the medium term that requires greater attention. Here we can learn from our own history. Just like Maverick, we were in this situation before: in the 1900s, in the 1930s, and in the 1990s. How did we get out of each of these predicaments? Economic growth.

The fiscal issue, as my colleague in state finances, Krige Siebrits, points out, is actually a political and growth problem. This means that the Treasury can exacerbate it with policy mistakes but certainly cannot solve it alone.

What’s needed is a three-step plan, just like the ANC had in the 1990s. Develop a credible fiscal consolidation program (akin to the GEAR initiative) for the next five years. Insist on political support of the Mandela/Mbeki kind for its implementation. Both political leaders strongly supported then Finance Minister Trevor Manuel and were willing to take a stand on it publicly. A good example is the Alliance Summit of July 1998, when a SACP leader said: ‘GEAR is an inappropriate policy that throttles social and economic transformation’. Mandela responded: ‘GEAR is the fundamental policy of the ANC. We are not going to change it because of your pressure.’ Mbeki took an even stronger stance the following day.

And, thirdly and very importantly, push for the development of a politically viable growth plan for South Africa. The Asgisa growth plan with its bindings constraints framework from the 2000s is an excellent example of this.

The good news is that the next election is just a few months away. Constant power outages remind voters daily of the ANC’s inability to govern. The gap between the DA government in the Cape and the chaos in Gauteng is growing wider. It seems inevitable that, bar a miracle, these economic woes and loss of credibility must be reflected at the ballot box. 2024 is indeed South Africa’s most important election since 1994.

Whether South Africa will face a fiscal crisis depends on the legitimacy of the economic growth plan the next government announces. If it’s credible, there will be buyers for South Africa’s debt at relatively affordable prices, which can provide short-term relief. If the plan starts to address the binding constraints of the economy – electricity, transport, labour policy – and economic growth increases to 2, 3, or even 4%, then there is light at the end of the tunnel.

Early in Top Gun, the Air Force admiral looks straight at Maverick and says: ‘The end is inevitable, Maverick. Your kind is heading for extinction.’ Maverick takes a moment and then replies: ‘Maybe so, Sir, but not today.’

South Africa has little time to avert a fiscal crisis. But it’s still in our hands. The Medium-Term Budget Speech on 1 November will show if Minister Godongwana has a short-term escape plan. Next year’s election will determine if we make it safely home.

An edited version of this post appeared (in Afrikaans) in Rapport on 8 October 2023. The image was created using Midjourney v5.2.