Latest budget underscores desperate state of South Africa's finances

Running out of options. Finance Minister Malusi Gigaba speaks after delivering his medium term budget.
REUTERS/Sumaya Hisham

South Africa’s 2017 medium-term budget policy statement represents a watershed moment in the post-apartheid economic and fiscal position. The best thing that can be said about it, is that it was at least frankly honest about the situation the country is facing. Arguably, there was no choice. The country has reached a situation where it’s no longer possible to spin the notion that public debt is under control.

In recent years, South Africa’s National Treasury has desperately, and creatively, tried to avoid making deep cuts to government expenditure, or imposing drastic revenue raising measures on citizens. It did this while still convincing investors and credit ratings agencies that public finances would stabilise.

But the 2017 medium term budget makes it clear that the project has essentially reached the end of the road. The notion that national debt will stabilise has now effectively had to be abandoned. South Africa’s latest finance minister, Malusi Gigaba, effectively gave up on the debt targets set out by Pravin Gordhan a year ago when he stated that net national debt as a percent of GDP should stabilise at 47.9% by 2019/20. Gigaba announced yesterday that this is expected to be 49.1% by the end of this fiscal year, increasing to 53.9% by 2019/20.

This is a clear sign that any attempt to stabilise debt has failed. A further ratings downgrade is now highly likely. And it will be worse than the last one which only affected foreign currency debt. Gigaba’s budget proposals are likely to lead to a downgrade of the country’s local denominated debt, which will increase government borrowing costs and could lead to significant capital outflows. Even without a downgrade the medium term budget reveals that debt service costs are expected to increase from 11% of total expenditure to 15% over the next few years.

Without higher revenue, that means less money to spend on government’s constitutional obligations and policy commitments. Unfortunately, the gloomy story is largely driven by a massive shortfall in revenue collection of R50.8 billion. So attempting to avoid these consequences through taxation is not looking like a feasible option.

In the current political environment, even the best case scenario is grim. In fact the country’s finances could worsen even further if the outcome of the governing party’s elective conference in December doesn’t see a return to good governance and responsible fiscal management.

Slippery slope since 2008

In the years since the global financial crisis that started in 2008, the government allowed expenditure to increase faster than growth and revenue. This was done with the hope of offsetting the short-term effects of the crisis and getting the country back onto a stable path of significant economic growth.

That led to a rapid increase in national debt relative to the size of the economy. But the failure of the economy to recover – due in part to political instability, bad decision making and poor governance – meant that this approach became unsustainable.

In the last few years successive national budgets have walked a tightrope in trying to contain the growth in debt. Planned spending has been reduced, while some tax rates have been increased and new tax instruments introduced. Amid all these manoeuvres, dramatic cuts to government expenditure, or wide-reaching increases in taxes, have been avoided.

Efforts to arrest fiscal decline were sabotaged by the removal of Gordhan in March this year. His removal meant that the institutional reputation of the finance ministry was compromised and, since it was this that had kept the country’s credit ratings intact despite increasing fiscal pressure, the country’s foreign denominated debt was downgraded to “junk” (sub-investment grade).

Storm clouds on the horizon

As if the picture wasn’t gloomy enough, numerous risks to the fiscal projections and proposals loom on the horizon. South Africa’s president Jacob Zuma continues to sit on the higher education funding report, causing further instability at universities. That leaves open the possibility that more money for university students may be needed at short notice.

And the finances of various state owned enterprises are teetering, requiring increasing government support to prop them up. Since Gigaba took over the ministry he has taken R5.2 billion from the R6 billion “contingency reserve” – which is meant to be used for emergencies, or other unforeseeable events, such as natural disasters – to prop-up South African Airways. This broke with commitments to fund bailouts using revenue from asset sales. The medium term budget cements this breach – funds used to prop up the airline will not be replaced with funds from asset sales.

But the most menacing risk is the power utility Eskom, which is propped up by R350 billion in debt guarantees, but faces rising infrastructure costs, stagnant electricity demand and successive corruption scandals linked to state capture. Due to the scale of the commitments to Eskom, it will be impossible to contain the negative consequences if its lenders start refusing to rollover its debt.

No political will

Reading between the lines of the medium term budget, there is evidently no political will at the highest levels – the president and his cabinet – to do the right thing. The only reduction in planned expenditure is a cut to the contingency reserve. But responding to rising debt by reducing money for future emergencies is emblematic of the reluctance to take braver decisions like cutting the bloated, pointless ministries seemingly introduced by Zuma to employ his political cronies and their associates.

South Africa’s public finances are in dangerous territory and very difficult decisions will have to be taken before the 2018 budget if the situation is going to be stabilised. This will require politicians and civil servants who are competent and dedicated to the public interest to make bold decisions. Without such leadership the resultant trajectory will undermine the ideals and objectives of the post-apartheid era for many years to come.

Seán Mfundza Muller, Senior Lecturer in Economics, University of Johannesburg

This article was originally published on The Conversation.

Gigaba lays bare South Africa's economic woes: will it be enough to trigger change?

South African Finance Minister Malusi Gigaba kicked the can of change down the road during his medium term budget speech.
Reuters/Rogan Ward

Wittingly or unwittingly, South Africa’s Finance Minister Malusi Gigaba’s medium term budget policy statement places him – and champions of the market economy inside and outside the African National Congress – in a strong position and opens the way for real economic change. Whether the opportunity is taken is, of course, another matter.

Gigaba revealed that the government’s revenue shortfall is two thirds higher than expected, spending is growing, as is the deficit which will not, as promised, stabilise next financial year. And growth projections are down from a poor 1.3% to a negligible 0.7%.

The minister announced no new measures which are likely to turn the situation around and another set of ratings agency downgrades seem inevitable. This is partly because the agencies take their cue from domestic economists and business people, all of whom see a downgrade as inevitable. The only rational response is surely that the economy is in a downward spiral and that the minister cannot or will not do anything about it.

Perhaps. But there is another way of looking at the speech which sees many of these negatives as potential economic game changers.

One reason for seeing an opportunity for change is that the speech provides more than enough grounds to begin two of the tasks which must be confronted if the economy is to turn around in a sustainable way. It provides a powerful lever for everyone who wants to resist patronage projects. And the scale of the problem does send a signal to all economic actors that a sense of crisis – the acknowledgement that the economy must change course if it’s to grow and include more people – is needed and that negotiations to change the economy are essential.

Watershed moments?

Gigaba’s speech made it clear that the argument that money is simply not available is now an understatement. One casualty might be the nuclear power project on which President Jacob Zuma and his faction seem to have set their hearts. There have been suggestions that Zuma’s primary objective in his most recent cabinet reshuffle was to insert a loyal person into the energy portfolio so that he could make the nuclear deal happen.

Gigaba is now signalling that there is no money for the project and so the reshuffle’s purpose may have been undone.

And the argument for structural change, not mere tweaking, is much stronger now than before the speech. The harsh realities he explicitly set out mean that any finance minister who wanted to shut the door on patronage, begin cleaning up state owned enterprises and kick-starting talks with other key players, such as the private sector, is in a very powerful position. This could open the way for bargaining between all the economic interests on how to grow the economy and open it up to those who are excluded.

It does not mean that Gigaba will take the opportunity. The fact that he kicked the can of change down the road during his speech, proposing no new plans for change – and that he has already granted South African Airways a bailout – seem to show that his apparent desire to please everyone leaves him ill-equipped to take any of the steps suggested here.

But, if we assume – as many people who observe him do – that Gigaba’s chief goal is to advance his political career, the numbers he quoted today suggest that he is unlikely to do that unless he can show that he did something to change the realities he described. It’s possible that the minister knows that these realities won’t change unless he takes some decisive steps.

Stage set for trade-offs?

The speech offers no solutions but it can hardly be accused of ignoring or concealing the problem. On the contrary, Gigaba made a great deal of his refusal to “sugar coat” the problem. Insisting that South Africans must know how bad it is, he added that citizens needed to understand the “challenges” because only then

(will) we … know what to do … as well as what trade-offs must be made in the public interest.

That sounds very much like an attempt to set the stage for some unpopular decisions and for engaging with key economic actors on what trade offs should be made. Clearly, a minister who hopes to please as many people as possible is not going to initiate major changes without very solid backing – the speech may well have been an attempt to get that backing.

So Gigaba could be trying to set the stage for a process in which the awful state of the economy enables him to gain support from key economic actors to introduce the “trades off” he promised.

Of course, the minister may have no plans to use his leverage in this way. But, if so, the speech may have provided an important lever to those who would want him to do so. It clearly was an invitation to private economic interests to engage.

If businesses take Gigaba up on the offer, they may well find themselves in a more powerful position than they imagined, given the state of public finances and of the economy. They certainly have economic reality on their side and, since the minister is not zealously attached to either of the African National Congress factions, he may well be inclined to support them if the alternative seems likely to promise his political ruin.

The speech showed that the economy is in crisis – it needs to change direction if it’s to serve the country’s needs. Whatever the minister decides to do, its effect will depend on how those in society who have an interest in that change choose to react. The stakes are clearly too high for them to fold their hands and wait for the minister to act.

Steven Friedman, Professor of Political Studies, University of Johannesburg

This article was originally published on The Conversation.

South Africa's finance minister admits situation is grave: but offers no solutions

South Africa’s Finance Minister Malusi Gigaba has been forthright in recognising the crises facing the country.
EPA/Stringer

The first mid-term budget delivered by South Africa’s newish Finance Minister Malusi Gigaba was always likely to be judged largely on three issues: whether he was able to inspire confidence, what the government plans to do with the crises at the various state owned enterprises and whether he would pronounce definitively on its commitment to firming up a nuclear deal with Russia.

Whatever else Gigaba said was likely to be regarded as extra.

On balance, he did reasonably well on the confidence issue. He spoke clearly and with assurance, even with authority. To be sure, he delivered a lot of flannel. He reminded South Africans of the promises of the National Development Plan and the government’s commitment to Vision 2030; he spoke about the iniquities of the maldistribution of wealth and inequality and the government’s commitment to redistribution; he deplored “the challenges” (that overused word) faced by state owned enterprises, the high level of concentration in the private sector and the need to make the economy more globally competitive. And he inevitably he hailed the urgent need for “radical socio-economic transformation”. Words, words, words, one might say.

Against that, Gigaba’s speech was forthright in recognising the immediate crises facing the country. While stressing the importance of economic growth, he indicated that growth was expected to fall to 0.7% per annum, down from a previous somewhat less miserable estimate of 1.3%.

He recognised that the budget deficit was expected to increase from 4.3% from 3.1%. And he conceded that with lower economic activity government revenue was going to fall: indeed, the consolidated government deficit would climb to 60% of GDP by 2022.

Against these grim statistics, he stressed the need for greater tax morality, expenditure cuts, greater efficiency in government’s supply chain management and increased vigour in fighting corruption in state owned enterprises. And he even managed to say all this without smirking.

While it was important that he made it clear that the government recognises the mess the economy is in, he was extraordinarily light on detail about how it intended to clear it up.

The ratings agencies will doubtless be pleased that Gigaba announced no hike in corporation tax. For its part the African National Congress and its alliance partners would have been equally pleased that he announced no rise in Value Added Tax, which would hit the poor hardest. By the same token, he left it unclear – save by vague commitments to cutting costs – how the increasing gap between revenue and expenditure is to be tackled.

Raiding the piggy bank

The biggest news in Gigaba’s speech was his announcement that the government intends to sell a portion of its shares in Telkom to enable a recapitalisation of South African Airways and the South African Post Office. Many would say that he was left with little choice. While he thanked the banks for not pulling the plug on the airline by not demanding repayment of their loans, his raiding of Telkom’s piggy bank was an acknowledgement that no-one else was going to risk their money.

He also addressed the crisis in state owned enterprises by highlighting governance issues. This included the appointment of new boards for the airline as well as the state broadcaster and the need for them to recruit efficient managers and to tighten up governance and accountability.

Fine words, but equally, this was no announcement of the government drawing back from its notion of state owned enterprises as key drivers of the “developmental state”. Their current crises had obscured much that they had achieved, he said, such as the development of a pool of competent state managers.

Many would say that it’s a pity that their competence is not more evident.

If Gigaba said just enough to indicate that the government intends to do something to address the problems faced by state owned enterprises, the most glaring gap in his speech was any firm indication of how to tackle the cesspit of corruption that the state power utility Eskom has become.

Far worse than that were his weasel words about any prospective nuclear deal.

Speculation is rife that President Jacob Zuma is determined to sign off a deal to build nuclear power stations with the Russian nuclear agency, Rosatom, as quickly as possible – a deal which many reckon would bankrupt the country. Yet Gigaba chose not to calm the market’s nerves but to remain as vague as possible. Very deliberately, he chose to repeat a previous statement by Zuma that the signing of any nuclear deal would take estimates of the potential supply and demand for energy into full consideration, and would only proceed on the basis of “affordability”. Nobody is likely to believe that.

No sign of a change in direction

So, what’s to be made of this first substantive effort by Gigaba? The good news is that he didn’t try and obscure the grim financial situation that the government is facing.

But the bad news is that despite the waffle about the need for “radical socio-economic transformation”, there was nothing in his speech to indicate that the government is considering a significant change in direction.

Yes, there was the commitment to selling Telkom shares, but that was merely akin to selling the family silver to keep the household finances afloat for a little bit longer. Apart from that, there was no real suggestion that the government will start doing things differently. And there was no indication about how it intends to close the steadily increasing deficit.

Roger Southall, Professor of Sociology, University of the Witwatersrand

This article was originally published on The Conversation.

South Africa's police: at times proud, at times shamed by the work they do

Most South African police officers view their job as primarily just that -
a job and a means to survive.
GCIS

Police officers are central to modern states and societies, including South Africa. But contrary to popular belief, the standard model of policing - random patrol, rapid response and follow up investigation - has limited impact on general crime.

Instead, crime and violence are shaped by a myriad of factors including: in utero stress; childhood loss of a caregiver, neglect and malnutrition; untreated mental health and cognitive disorders; stark income and opportunity inequality and related constructs of and damage to masculinities; and early exposure to violence, including at home and school. About much of this, police alone can do little.

Rather, many South African police officers are the products of the same forces that shape the “criminals” against whom they are pitted.

In 2012/13 I spent eight months shadowing SAPS officers as they went about their work at four stations: two in Cape Town (one poor township, one affluent city) and two in the Eastern Cape (one rural town, one rural village, both poor). Aware of the limits of policing, I wanted to explore who officers thought they were – the stories they told themselves about themselves – and how these shaped their work. My findings have just been published in the book, Police Work and Identity.

So what did I find?

Accidental officers

Born and raised in the poverty stained shadow of South Africa’s minority wealth, most officers I met found themselves in the SAPS after original aspirations had slipped beyond reach. Some told stories of having disliked or been in conflict with the SAPS before signing up.

Yet, once inside, given a gun and uniform and asked to do the dirty work of a fragile and anxious democracy, they found themselves rewriting their self-narratives. They told themselves the SAPS was not ideal, but it was not bad either. It offered them secure employment, a decent salary and, often, interesting and rewarding work in a country where these are rare.

And so, for most officers a job in the SAPS is primarily just that, a job - a means to strive and survive in contexts of great precarity. The meaning and income the work brings to officers’ lives is usually more important to them than the work they carry out. Consequently, they seek first to please managers, and so to ease the pressures placed on them.

They enact institutional performances that promote the myth that the SAPS is a rational, effective, evidence based and rule-bound organisation consisting of well-trained officers performing common sense crime prevention tasks. This, while hiding the grimy by products of police work. Through official reports and statements, and carefully choreographed public performances, the SAPS and its officers present a strategically crafted façade behind which they cocoon themselves and seek to build their lives on the precarious socio-economic terrain of contemporary South Africa.

Because officers are aware of their limits, and that the SAPS’ public face is part fiction, some officers seek to distance their identity from the organisation. Instead, they present themselves in private as what might be thought of as “accidental police officers”, people who had hoped for more in life and who thus deserved more respect and dignity than the South African public gave them. But, with prospects of comparable financial remuneration and job security outside of the SAPS unlikely for most, they simultaneously and contradictorily invest in and protect the SAPS image. This is achieved both through dedication to legitimate task, and by ignoring abuse by colleagues.

Incongruence

While officers aspired to lives characterised by middle class materialism, few had the money to do so. Instead they deferred their dreams to their children, investing in their education, while sharing what little remained with networks of precarious kin.

Some officers invested in more than their immediate relatives. They volunteered their time and money to support youth in their communities who they believed to be at risk. Like the skollies (the colloquial name for thugs) they hunted at work, the teens reminded officers of themselves.

By investing in them officers hoped to deflect the teens from the violence of the criminal justice system. In a sense, they offered them carrots so that they might avoid becoming the objects of the violence through which some officers asserted their right to manhood and respect on the job.

A notable portion of the police behaviour I observed was in congruent with the imagined ideals of an exemplary police service. In less orderly spaces – the township and rural town for example – police were more likely to disregard traffic laws, litter, speak their prejudice, and resort to violence.

Their turning to such behaviour in such spaces has its roots in the disparate ways the apartheid state governed Black and White space, and the opposition to state law and authority this fostered. Extended into the democratic era, it seems that disorderly space encourages disorderly police conduct, while order encourages police compliance. As such, police reproduce both order and disorder in their work, rather than enforcing order.

Raised on the periphery

Who do SAPS officers think they are and how does it shape police practice?

Like so many South Africans, they are men and women born and raised on the periphery, chasing a vision of a more prosperous future. At times, proud, at times, shamed by the work they are required to do, they are nourished by the knowledge that while they may not be able to make South Africa safe, they can provide themselves and those they care for, with a better life than the one they were born into.

In the meantime, they do what they must do to get through the day, hold fast to the story they tell themselves about themselves, and with it secured, strive to colonise the future with a vision that is golden.

Andrew Faull, Independent Researcher and Research Associate, University of Cape Town

This article was originally published on The Conversation.

South Africa's ANC is celebrating the year of OR Tambo. Who was he?

Oliver Reginald Tambo served as ANC president from 1967 to 1991.
Reuters

Oliver Tambo’s name and reputation are lauded, not least because he succeeded, remarkably, in keeping the African National Congress (ANC) together as a liberation movement during an exile lasting 30 years. Despite this legacy, the ANC, now South Africa’s governing party, has seen a year culminating in what is, arguably, its greatest crisis. Today, factions within the ANC nostalgically point to the example of Oliver Reginald Tambo , or OR as he was affectionately known in party circles.

Evidence of systemic corruption and factionalism for personal gain within the ANC are blamed for the failure to deliver improved living conditions to the poorest communities. The loss of three major metropolitan municipal councils in the industrial heartland testifies to diminished confidence in the ANC.

By contrast, in the year of his centenary, Oliver Tambo is held as an exemplar of integrity, personifying the ideal of a leader who for 50 years selflessly served the movement, consistently holding up the goals of a humane and caring society.

But who was this much talked about Tambo? And what lessons can be learnt from his leadership?

Exile

In 1960, after the Sharpeville massacre, then ANC President Chief Luthuli instructed Tambo to leave South Africa as an international diplomat of the ANC. His task was to mobilise a worldwide economic boycott.

With hindsight it was a prescient judgement call. The military wing of the ANC Umkhonto we Sizwe was launched a year later and within two years leaders of the ANC were facing charges of treason in the Rivonia Trial. The trial, which stretched through 1963-1964, led to life sentences for the leaders of Umkhonto we Sizwe, which included Walter Sisulu, Nelson Mandela, Govan Mbeki and Ahmed Kathrada.

Tambo’s task was to alert the world to the horrors of apartheid South Africa, and to seek assistance and support from newly independent states in Africa. It was to be more than 30 years before he returned home in December 1990. During this time, his integrity combined with his keen intellect and natural warmth impressed many people in diverse countries around the world.

Consensus seeker

Tambo was a careful and astute listener. He followed the indigenous African consensus system of decision making, crafting a conclusion that included at least some of the opinions of all participants.

He believed that the ANC should maintain the “high moral ground” and that it should be a broad umbrella under which all enemies of apartheid could shelter and enrich the movement, irrespective of their political beliefs. He was also cautious, likening the challenge of the liberation struggle to the traditional “indima” method of ploughing a very large piece of land. He explained at a Sophiatown meeting in 1953.

There’s a point where you must start. You can’t plough it all at once – you have to tackle it acre by acre…

One of Tambo’s strengths was his constructive and creative response to criticism. In 1967, for example, following the failure of Umkhonto we Sizwe cadres to reach the borders of South Africa after a battle at Wankie in “Rhodesia” (now Zimbabwe), Chris Hani and others, disillusioned with the leaders’ lethargy, released an angry memorandum. In an interview I did with Hani in Johannesburg in 1993 he admitted: “We blew our tops.” They accused the leadership of Umkhonto we Sizwe and the ANC of getting too comfortable and losing their appetite to return home – they had become “men in suits, clutching passports”.

The response by the leadership was outrage – the Secretary-General Alfred Nzo called for Hani’s execution for treason. But Tambo immediately began organising a conference of elected representatives of the branches around the world. A message was sent to Robben Island to inform ANC leaders jailed there, including Nelson Mandela, of this development.

It was time for frank conversation and a comprehensive, considered assessment. The outcome was the historic and constructive conference at Morogoro in Tanzania. The conference took on a more inclusive and democratic direction for the ANC, foregrounding the political aims over the military, and identifying the importance of mobilising workers at home.

Challenging 1980s

In the 1980s Tambo was faced with a more serious challenge. International attention against apartheid was growing; he was travelling extensively, persuading ordinary people to undermine apartheid by boycotting its products and banks and denying it arms. Alarmed, the apartheid regime sent spies into ANC camps on the continent, infiltrating top committees in Lusaka and other ANC structures.

The panic that ensued turned the spotlight on the flaws of the Umkhonto we Sizwe leadership. Human rights abuses of suspected spies and “ill-disciplined cadres” led to unlawful deaths and executions.

Tambo’s cautious response was criticised by the leadership of both ANC intelligence and Umkhonto we Sizwe for “impeding investigation” into the spies, owing to “his sense of democracy”. The chief culprits of these human rights abuses were formerly trusted peers of Tambo. He faced the dilemma of blowing the ANC wide apart if he challenged them. Instead, he resorted to the compromising strategy of redeploying them to other sections of the movement, such as education – perhaps leaving an unfortunate legacy for today’s ANC.

Enduring legacy

Tambo was to set in motion a process that culminated in South Africa’s democratic constitution. He:

• subscribed Umkhonto we Sizwe and the ANC to the Geneva Convention, which imposed a strict adherence to human rights.
• set up a commission of trusted senior comrades to look into the conditions in the ANC’s camps in Africa as well as abuses. The commission’s report was highly critical.
• summoned an consultative conference in Kabwe in 1985 that reaffirmed ANC’s humanist values, addressed gender inequalities and formally accepted whites in official positions.
• appointed the movement’s top legal minds to research and craft a constitution for the ANC; it was inspired by the Freedom Charter, which had been drawn up in 1956 after extensive consultation with ordinary people. It opened with the ringing words:

South Africa belongs to all who live in it.

South Africa’s new democracy essentially incorporated many of the clauses in the charter’s the path-breaking 1996 constitution.

Tambo’s insights remain relevant

Reporting to his first conference inside South Africa in December 1990 after the unbanning of the ANC, Tambo warned that “suspicions will not disappear overnight, the building of the South African nation is a national ask of paramount importance.

And he warned:

The struggle is far from over: if anything, it has become more complex and therefore more difficult.

He also reflected that "we were always ready to accept our mistakes and correct them.”

Faced by crises in the ANC, Tambo had always been ready to listen, responding constructively and creatively with new policies to meet the challenges of the time.

This is the enduring legacy of Oliver Tambo: many seasons later, many continue to gain insights and learn relevant lessons from his responses to the universal, human condition of our time. But whether they heeded this call is a moot point:

I have devotedly watched over the organisation all these years. I now hand it back to you, bigger, stronger - intact. Guard our precious movement.

Luli Callinicos, Researcher and founder member of the History Workshop, University of the Witwatersrand

This article was originally published on The Conversation.