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Four ways Godongwana's October budget statement can boost confidence

Natale Labia
By Natale Labia
15 Oct 2024
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It is no exaggeration to say that Finance Minister Enoch Godongwana’s Medium Term Budget Policy Statement, to be delivered on 30 October 2024, will be the most critical moment in South Africa’s economic trajectory since 1994.

The first coalition government formed out of political necessity in South Africa’s democratic history has enjoyed a honeymoon period of broadly positive domestic sentiment, relatively benign economic news and (albeit cautious) investor optimism.

However, rhetoric such as that displayed in Cyril Ramaphosa’s State of the Nation Address and his address to the UN last month, can only get one so far. Ultimately it will be the decisions of this government, which could – and should – often run contrary to the interests of many entrenched powerbrokers, that will be the difference between this experiment succeeding and persisting or failing.

The moment for action is now. In his speech the minister must do four things.

First, he should say that the future looks bright for South Africa, and that all citizens should be broadly optimistic about this new coalition arrangement, euphemistically and paradoxically dubbed the “Government of National Unity”. He should present the government’s vision of where it sees the South African economy going, and why it believes things will get better. At some point, this government will have to do unpopular things. As UK spin doctor Alastair Campbell has noted, “it is possible to do unpopular things in government and stay popular, but only if you give a very clear sense of direction about where you're going and why one needs to do such things”.

Second, he must make it clear that this government is going to do the basic things better. Already we have seen signs of that from the wildly ambitious pledges of the new ministers in this government. Early indications, particularly Leon Schreiber in Home Affairs, give cause for cautious optimism. Indeed, things have been managed so abysmally poorly in South Africa that the low-hanging fruit for this government is abundant. It would be hard to manage the services of the South African state worse than the ANC administrations of the past 15 years. Just  starting to do things less badly could instil real hope and trust in this nascent political experiment.

Third, investors will be looking for concrete signs that South Africa’s protracted fiscal decline and deterioration is coming to an end. Despite flattening post-Covid-19, South Africa’s debt to GDP has almost doubled since 2012 to more than 70%. However, recent signs are positive. The country recorded a primary budget surplus — where revenue exceeds non-interest expenditure — for the first time in 15 years in the first quarter to March 2024, raising hopes that debt stabilisation might be in reach. Final outcomes for the key metrics are due to be published with the Medium Term Budget Policy Statement, and expectations will run high.

Greeted with enthusiasm


The international investor community has greeted this government with enthusiasm, as evidenced in Vice-President Paul Mashatile’s investor meetings last month, which culminated in a lavish gala dinner at London’s Savoy Hotel. However, their patience will not last forever. Should the global economic clouds darken, investors will once again demand greater evidence of fiscal normalisation from the coalition government, which was lacking through the Zuma years and then Covid-19.

Unequivocal statements that the government will be tough on public sector wages is critical, particularly after the recent demands of an extraordinary 12% rise. Furthermore, clarity on populist frippery like the NHI will be needed. Is this a serious government capable of making difficult and potentially unpopular decisions, or a marriage of momentary convenience that will break up at the earliest sign of more attractive electoral prospects elsewhere?

Finally, and most importantly, he must offer a credible path to getting South Africa back to a higher growth trajectory of at least 3%. Vacuous promises are not enough. The reality is that investment is sorely lacking, and productivity is to blame; given structural factors South Africa has simply not been an attractive enough place to invest and hire for more than a decade. According to the International Labour Organisation, South Africa ranks 75th out of 181 for labour productivity, just behind Botswana. Research by the World Bank ranked South Africa 80th out of 170 countries for productivity growth in 2015-2021. During this period, the rate of local productivity growth — as measured by GDP per employed person — was only two-thirds of the pace seen globally. As a result, real per capita GDP peaked in 2011 and has been declining ever since.

Everyone knows why and who is to blame. However the solutions will be harder to come by, and it will be up to Godongwana to elucidate exactly what he believes they are and how they will be implemented by this motley coalition government. Many within South Africa, and abroad, will be eager to hear. He had better not disappoint. DM

 

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