Nene and his Plan to appease Moody’s Rating Agency

The role of the decisions of international Rating Agencies is by now known even to the Minister of Finance. Insulting them Gigaba-sytle did not really bring the country forward, hence a more careful stance has to be chosen to appease them. Past and present Finance Minister Nhlanhla Nene has therefore promised both, a fiscally conservative mini-budget and a rather generous stimulus package for the up-coming “Mini-Budget” in October. Nene was speaking at the Moody’s Investors Service sub-Saharan conference in Johannesburg yesterday. Here are five highlights from his address:

h3. 1. Conservative Mini-Budget combined with Presidential Stimulus Package

“Fiscal sustainability must remain the focus of government’s efforts. There will be a prudent fiscal policy over the longer term.” The minister said that the government debt would stabilise at about 60% of GDP, although the medium-term target is 55%. Nene also confirmed that President Cyril Ramaphosa will next month unveil a stimulus package to kick-start the economy, which fell into (technical) recession earlier this month. Ramaphosa is also planning a jobs and investment summit in October as another response to the ailing economy.

h3. 2. Slimming down of Public Service

The new public service wage agreement will add a whopping ZAR 30.2bn onto medium-term expenditure estimates to pay for an inflation-busting state wage bill, but Nene pledged compensation ceilings for 2018. Those will be achieved by severance packages and early retirement offers to the older staff in the 1.3 million civil service. The cost of the wage deal is being offset by the one percentage point increase in VAT.

h3. 3. SARS commission of Inquiry to improve Tax Collection

Tax collection was down ZAR 50bn in 2017 and it also missed the 2018 target, although by a smaller number. Nene says the Commission of Inquiry into tax administration chaired by retired Judge Robert Nugent will help identify efficiencies at SA Revenue Service to lift the revenues over the medium-term. Nene suggested that SARS will deliver above projected revenues compared to what was envisaged in this February’s budget speech.

h3. State-owned Companies on the mend

Nene told the conference that the state’s bouquet of publicly owned companies reflected a legacy of poor governance but they were on the mend under the assiduous glare of Public Enterprises Minister Pravin Gordhan. Three state-owned companies – Eskom, Transnet and the Trans-Caledon Transport Authority – were back in the capital markets. In the past, said Nene, the government looked to the state-owned entities to drive infrastructure, but their ability to contribute to growth had been significantly weakened. He said that no amount of fresh capital or debt was sufficient to bring the complement of state-owned companies back to a firm footing and that new models were needed.

h3. Public Private Partnerships

Nene revealed that National Treasury has developed a pipeline of 64 infrastructure projects that government hoped to run with the private sector in public-private partnerships.

h3. Our Comment

Whether Moody’s will be appeased by those measures is to be seen as Moody’s has not set a fixed date for their next review of South Africa. From Into SA perspective, the key measures envisaged are not enough and partially beside the point. The Emerging Market Currency Crisis needs to be addressed by assisting importers to hedge their exchange rates while encouraging local manufacturers to either start or increase exports. That would not only bridge the gap of collected taxes but also bring the Trade Deficit back into reasonable dimensions, a first good signal to the outside world where Moody’s sits and assesses the risks of credit-hungry South Africa. Secondly – and as a logical consequence – makro-fiscal policies have to be discussed with SARB on order to prepare for imported inflation increase combined with the danger that the Monetary Committee considers interest rate increases. The “Presidential Stimulus” would evaporate faster than morning fog if another rate hike is on the cards.

While addressing the millions of costly public servants is a good step, serious steps are needed to address the down-times in the private sector caused by Wild-Cat strikes and a generally unmotivated workforce in combination with far too powerful unions. The labour law value catalogue needs to be addressed and the balance of power re-established so that productivity and continuity enable businesses to thrive again and – subsequently – add to Nene’s coffers again!

Finally, Nene and Davis better prepare themselves for what#s to come after China and Turkey, when Trump will address and assess AGOA and the trade between Africa and the US as a whole. He wants a revival of the US car manufacturing and seeing how many cars are produced in SA and exported to the US is surely being addressed by raising duties. He stated “Africa is a shithole, but my Friends are making money there”. Why everywhere you only here locals whining about the first part of the statement, exploring the second half needs to be the focus of the day. Nene needs to show incentives for US companies to explore and invest in SA as their FDI share is ridiculously small compared to other, much smaller countries.

But in the end all good advice and suggestions are wasted on this government that is already spending most of its time campaigning for next year’s elections. Personally, I have little hope for a serious course correction and only hope that the internal fights within leadership and parties will lead to breaking down this ailing giant, which was once a liberation force, into healthy segments willing to work and co-exist with kindred spirits for the benefit of this beautiful country!

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