Stimulus measures to combat Covid-19 could push the budget deficit to 14% of GDP, warn economists
Government’s R500 billion in stimulus measures to combat the effects of the Covid-19 coronavirus pandemic could push the budget deficit to 14% of GDP and leave South Africa with a debt burden that could last for years, economists warn.
For this year, an economic contraction of between 7% and 17% is expected, depending on how long it takes to put a stop to the pandemic.
At a press conference on Friday afternoon, Finance Minister Tito Mboweni said that, together with the monetary response of the SA Reserve Bank – which cut the interest rate and made certain concessions to banks – the stimulus measures amounted to about R800 billion.
- R20 billion for healthcare;
- R50 billion in grants and additional allowances;
- R20 billion for municipalities;
- R140 billion to create and protect jobs;
- R70 billion in tax relief; and
- R200 billion for a national credit guarantee scheme between banks, Treasury and the Reserve Bank to help 700 000 businesses and 3 million employees with loans.
On Tuesday, President Cyril Ramaphosa said R130 billion of the stimulus package would come from reallocations in the current budget.
Mboweni said he would deliver a revised budget to provide for all the aid measures.
Everything considered unnecessary in the original budget that was presented in February would be used and certain programmes would be postponed.
Mboweni said that in the new economy after Covid-19, businesses would have to employ more South Africans than foreigners, and that businesses that apply for loans at banks must be able to prove that they offer more opportunities to South Africans as employees.
“There is nothing xenophobic about this,” he said.
To trade, spaza shops will have to have licences and bank accounts, and be registered with the revenue collector. They will also have to be open for regular inspections by health inspectors.
South Africa also needed to win back some manufacturing that had been lost to China over the past few years, he said.
Hugo Pienaar, an economist from the Bureau for Economic Research, said the direct income and expenditure measures (excluding the loan guarantee of R200 billion and reallocations) amounted to about R172 billion (or 3.3% of GDP), which would bring the budget deficit for 2020/21 to 14.4% of GDP.
The poor economic growth prospects and the R4.6 billion that will be required for the deployment of the SA Defence Force could push this up to as much as 15%.
Michael Sachs, an assistant professor at Wits University who previously headed the national budgetary office, said in a virtual panel discussion hosted by the Centre for Development and Enterprise that the cost of not taking action would be far greater than the planned intervention.
This was despite the country’s finances being under pressure even before Covid-19 and the fact that a great deal of money would have to be borrowed to finance the stimulus measures.
Mike Schüssler from economists.co.za said the fact that South Africa would have to borrow more money – and at higher interest rates as a result of the country’s downgraded credit rating – to balance the books could push debt servicing costs up to 6.5% of GDP from 4%, and even up to as much as 9% by 2023.
Schüssler said the money for the stimulus package could come from cuts to government expenditure, increased taxes, a wealth tax (which is unfair to pensioners and people who own assets such as houses because their wealth is also negatively affected), halting financial aid to dysfunctional state-owned enterprises (SOEs) and forcing pension funds to invest in government bonds (prescribed assets) or international aid at a reasonable interest rate.
Phillippe Burger, vice-dean of strategic projects in the faculty of economy and management sciences at the University of the Free State, said that, if government could make a capital contribution of 20%, while the Reserve Bank financed the rest, the total additional government loan would be R210 billion, or about 4% of GDP.
That would have brought the budget deficit to almost 11% and would probably increase the state’s debt as a percentage of GDP from 61% in 2019/20 to 73% in 2020/21, said Burger.
The more government intends to supply, the more it will have to borrow.
Burger said that even before the Covid-19 crisis, the broad unemployment rate was 38%, with just four out of every 10 South Africans of working age employed.
The situation would now get worse and, from a humanitarian and political stability point of view, government had no choice but to increase social grants and institute a Covid-19 crisis allowance of R350 per month for the unemployed.
He said aid from the International Monetary Fund (IMF) was a good option for South Africa.
Mboweni said on Friday that aid from the IMF and the World Bank was not the mountain that many with ideological objections made it out to be.
South Africa is a member of both, pays its membership fees and can approach these institutions.
Both have facilities in place to offer Covid-related assistance. At least $4.2 billion (R80 billion) is available to South Africa during the crisis.
According to the minister, Dondo Mogajane, director-general of finance, is in conversation with both institutions, as well as with the Brics (Brazil, Russia, India, China and South Africa) bank, the New Development Bank.
Pienaar said that, because this was special disaster aid, it would come with few conditions and the loans would have to be paid back over a period of three to five years at an interest rate of just over 1%.
Sachs said South Africa could borrow up to $20 billion from external creditors without too many conditions being tied to the loans.
The country should, however, be cautious when it comes to conditions linked to loans from external creditors.
He is surprised by the R130 billion that government plans to reallocate from the existing budget and is unsure how this will be possible.
Pienaar expects that the provincial allocation from Treasury would be further cut and that capital expenditure would be negatively affected.
If government extended a freeze on salary increases in public service, it could make about R116 billion available over the medium term, but, without that, it’s hard to see how the state would get to the R130 billion figure, he said.
Analysts and economists welcomed the stimulus package, but are concerned about what would become of promises of structural reform, advancing local manufacturing and industrialisation, the sorting out of SOEs and promises of inclusive growth in the wake of the pandemic, because South Africa has not made much progress in these areas, even since Ramaphosa’s inauguration in 2018.
Sustained low growth, and the burden that SOEs such as Eskom and SAA have put on state finances, were some of the reasons Moody’s Investors Service downgraded South Africa’s sovereign debt to “junk” status a few weeks ago.
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