Budget 2018: Ratings agency still gloomy amid talk of renewal

“In October last year, things were bad.”

Describing the path to where South Africa is today, Treasury’s Director-General Dondo Mogajane didn’t mince his words.

“Growth was bad. State Capture issues came out in the open. South Africa was at its lowest ebb.”

And Treasury, says Mogajane, was up against it in every sense. When trying to persuade government of the severity of South Africa’s economic position, Treasury officials were met with disbelief and resistance.

“No one believed us in government,” he says. “They said: ‘You are cooking up the numbers’.”

Mogajane was speaking at a Daily Maverick event on Thursday, with the previous day’s hard-hitting Budget still percolating through the South African consciousness. He was making the point that the Budget’s “tough decisions” were unavoidable, given the starkness of South Africa’s fiscal situation.

On hand to remind the audience of just how delicate South Africa’s situation looks to the outside world was Konrad Reuss, managing director of rating agency Standard & Poor’s for sub-Saharan Africa – or as Daily Maverick’s Richard Poplak put it, the man who has the ability to “bury us”.

While Mogajane waxed lyrical about the “new sense of optimism and renewal” in the air, Reuss had words of warning.

“In South Africa today, we are where we were in Brazil two years ago,” Reuss said.

Brazilian president Dilma Rousseff had just been removed from office on the back of a corruption scandal, and a similar spirit of enthusiasm and energy was in the air.

That didn’t last long.

“We’ve just had another [ratings] downgrade for Brazil in January,” Reuss said. The country instituted fiscal and structural reform – and then hit “road blocks”. Today, Brazil’s debt remains unsustainable and its economic growth weak.

“South Africa must show us today it can do better,” Reuss urged.

From the perspective of Standard & Poor’s, Reuss said that Wednesday’s Budget was a step in the right direction towards addressing “lots of stuff that looked very scary”. He listed “dismal” economic performance, fiscal performance and the “liabilities” of state-owned enterprises as the three areas of greatest concern about South Africa to the ratings agency.

And there’s still a long way to go: Reuss reminded the audience that South Africa would need two upgrades from Standard & Poor’s to reach an investment grade rating.

But is austerity the answer to South Africa’s economic woes?

Economists like Paul Krugman would argue against it, pointed out Poplak. Given that South Africa’s debt-to-GDP ratio is still far lower than countries like the US or Japan, might now not be the time to spend more – on economy-boosting infrastructure projects, for instance?

“The reality is that I’ve got Konrad on my case,” rebutted Mogajane, gesturing to Reuss. When it comes to countries like the US or Japan, South Africa is “miles apart”, Mogajane suggested – and not in a good way.

“They can sustain that [level of borrowing] because they produce,” said Mogajane. “Our manufacturing sector is… I mean, it’s very bad.”

As it stands, Mogajane said, attracting investor interest in South Africa over the past year has been an uphill slog. He said that when Treasury officials made the rounds in October 2017, investors took one look at the low economic growth and tax under-collection and chose to “look the other way”.

Mogajane said: “Imagine we went there with 100, 200% debt to GDP. I wouldn’t have been alive right now.”

He pushed back on the assessment of the Budget as an “austerity budget”, however, claiming that it was still “pro-poor” and pointing out that spending in all categories increased above inflation. Mogajane also pointed to the R1-billion that has been budgeted for small business start-ups as evidence that Treasury’s eye is on growth rather than austerity.

But money for starting small businesses is insufficient on its own, suggested 10x Investments CEO Steven Nathan. Entrepreneurs also need a conducive regulatory environment. Nathan said this is particularly critical because small and medium enterprises (SMEs) are the major drivers of job creation – more so than big companies.

Enter gloom-merchant Reuss once more, jug of cold water in hand.

Reuss suggested that Standard & Poor’s Johannesburg operation is essentially an SME, in that it employs only 25 people. But without a heavyweight international partner, said Reuss, there would be little incentive to run it in South Africa due to the bureaucratic nightmare of doing business here.

“I wouldn’t want to be here without a big brother somewhere,” said Reuss: a global mother ship with deep pockets and a big legal department.

“I would not want to run it by myself with all the administrative hurdles, tax requirements, and so forth.”

Mogajane took notes, nodding. “It’s important that we ease the ease of doing business,” he acknowledged.

Reuss at several points confessed himself to be somewhat perplexed by certain aspects of South African politics and society. He appeared to find the influence of trade unions on government confusingly obstructive: “It is against their own interests to advance labour market reform,” he said.

The ratings boss also expressed bemusement at the South African preoccupation with free higher education, suggesting that it ignored alternative paths – such as technical apprenticeships – to entering employment.

It was in his concluding remarks, however, that Reuss really cast a pall on the room.

Some years ago, he recalled, he met with the finance minister of Tunisia.

“He said, ‘I’m so scared, I’m really, really scared. We will have a tsunami of young people hit our job market and I don’t know what to do with it.’”

What happened next?

“Arab Spring,” said Reuss.

“That’s the downside of free higher education. What do you do with all the students that graduate from university?” DM

Photo: Minister Gigaba flanked by Deputy Minister Buthelezi, SARS Commissioner Moyane and DG Mogajane). Minister Melusi Gigaba delivering his 2018 Budget Speech, National Assembly, Cape Town. 21/02/2018, Elmond Jiyane, GCIS.