Coronavirus stimulus | Less orthodox interventions might help SA, say economists

The unprecedented R500 billion stimulus package announced by President Cyril Ramaphosa on Tuesday could see South Africa lose its middle-income economy status post the coronavirus battle if it is not willing to move away from “crude” and orthodox economic approach, warned economists on Friday.

President Ramaphosa’s Covid-19 package, which is equal to 10{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of the country’s GDP, has been lauded across the business and investment fraternity. However, as government plans to borrow most of that package – except for the R130 billion that will be reprioritised from the current budget – economists say SA will face years of debt distress, unless it finds ways to raise more of what it needs to fight the virus from local funding sources.

While Finance Minister Tito Mboweni gave a brief address on Friday afternoon giving some additional information on the stimulus, much of the detail still remains unclear. Mboweni indicated that government programmes that could be postponed, would be; and added that SA is entitled to apply to international funding institutions for aid, though he did not elaborate in much additional detail. A further ministerial briefing is expected on Saturday at 10am. 

Even before the virus and the need to borrow for this stimulus package, SA’s debt-to-GDP ratio was expected to exceed 70{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of GDP by 2022/23. Now some observers, including Coronation Asset Management, predict that it is likely to breach 90{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in five years’ time.

During a panel discussion hosted by development think tank, the Centre for Development and Enterprise, former Treasury official and University of the Witwatersrand (Wits) Professor, Michael Sachs, said SA will face years of debt distress. He says SA will likely see L-shaped recovery, which means a long period of stagnant growth and more than a decade to get back to where our GDP used to be.

“If our state is unable to construct a social compact that drives forward a path of fundamental economic transformation and new ideas about distribution, we will find ourselves in a period of debt distress. South Africa will find itself much more in a position of a developing country than in the middle-income countries in the global order of things,” said Sachs.

Finding internal funding sources

He said SA needs to finance as much of this R500 billion expenditure internally as possible. This can include reallocating budget that finance minister, Tito Mboweni, announced in February to more urgent areas. Redirecting housing grants budgeted for provinces, drawing some of the R250 billion in cash balances sitting with the National Revenue Fund and using surpluses in other state agencies other than the UIF are just some of the options available, he said.

Possible taxation of high-net-worth individuals could be looked at.

“We need to keep taxation on the agenda,” he said, adding that while charitable contributions by wealthy families were highly appreciated, SA needs to have a conversation about taxation.

Lumkile Mondi, senior lecturer in economics at Wits, said government also needs to look at cutting funding that had been earmarked for state-owned companies that have no potential of repaying the guarantees given by government. Government also needs to put the privatisation conversation back on the table and investigate the possibility of temporarily printing more money through the SA Reserve Bank in phase 3 of the country’s response to the pandemic, which entails growing the economy post the virus.

Sachs said timing might not be right to throw the option of privatisation in the mix. But SA should be careful not to take “crude” positions that are too radical like printing of money or too conservative such as arguments that monetary policy must not be used.

Citi Bank chief economist, Gina Schoeman said international bond investors might have appetite for the “less orthodox” approach proposed by Sachs.

“The bond investors that we are seeing more and more of; they don’t just invest in South Africa. They invest in emerging markets. That means they have suspected for a long time that at some point we would have to become relatively less orthodox in our policy, because flattening the inequality curve, that is seen as a good thing for South Africa’s future,” she said.

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