Mboweni sees economy contracting by 6.4%, struggling Land Bank saved

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Finance Minister Tito Mboweni has said the South African economy could contract as much as 6.4% this year due to the coronavirus outbreak and the budget deficit could swell to more than 10% of gross domestic product.

In a recording of a conference call with clients of the Goldman Sachs Group, Mboweni said he the expected the contraction to be deeper than the 5.8% forecast by the International Monetary Fund, and said the rebound to 4% economic growth the lender projects for 2021 is possible, but will require significant structural changes to the economy.

"We are operating under very severe constraints," he said on the call. The projected rebound "is possible but will require South Africa to be quite strong in structural reforms and the recapitalisation of some of the firms which may come under stress during this period."

While Mboweni will table an adjustment budget, including to redirect R130 billion of spending to help fund the R500 billion stimulus package announced by President Cyril Ramaphosa, a date for that has not been set and the growth and deficit estimates given on the call are the first glimpse of what it may contain. The funding reprioritisation could include delaying some spending on infrastructure, Roy Havemann, the Treasury’s chief director of financial markets and stability, said on the call.

The pandemic and a national lockdown that will only be gradually lifted after five weeks starting May 1, is weighing on output and will reduce tax revenue that’s been falling short of targets for most of the past five years. That, and financing some of the stimulus package, will increase the shortfall on the national budget and increase borrowing requirements.

There will be "quite some substantial tax losses, probably totaling some minus 32%," Mboweni said. Government debt could go as high as 80% of GDP, "which we are very concerned about" and on the budget deficit "it’s safe to say one must not be surprised if the deficit is north of 10% of GDP," he said.

Saving the Land Bank

In a wide-ranging conversation Mboweni said the government would "do whatever it takes" to ensure the survival of the Land & Agricultural Development Bank, the biggest lender to South African farmers, as it struggles to meet it debts.

"The Land Bank is facing severe liquidity issues. It also came to my attention that they will be unable to pay salaries if they go on like this," he said. "It is in the interests of South Africa, and the government and the farming sector, that the Land Bank is brought back to its peak."

Mboweni dismissed the opposition of some officials in the African National Congress and its alliance partners to approaching the IMF for assistance on the grounds it could compromise South Africa’s sovereignty. He rejected ruling party opposition to reforming the economy and suggestions that private pensions be forced to invest in state infrastructure, a practice known as prescribed assets.

"I just don’t have time for ideological conversations at the moment," he said. "Some of us are getting old, we don’t have time to debate the issues we were debating at high school. We have to grab the animal by the scruff of the neck."

Havemann was enthusiastic when asked about a proposal that South Africa sell a $5 billion social bond.

"It would be great if we could get a social bond away at a low interest rate," he said. "We certainly wouldn’t say no to it."

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