By Rafiq Raji, PhD
South Africa’s finance minister Pravin Gordhan delivers the medium-term budget policy statement (MTBPS) – “mini budget” – on Wednesday (26 October). Mr Gordhan has the unenviable task of persuading market participants that South Africa would remain on the path of fiscal consolidation. He would probably raise the corporate income tax rate, some suggest. Higher personal income tax for the wealthy and a new wealth tax may also be on the cards. Crucially, his views on putting state-owned enterprises on a sustainable path would be of keen interest. That is, even as he increasingly has less clout with them. Recent events, like the ‘FeesMustFall’ protesters’ demand for free education for all, suggest that even if Mr Gordhan were not facing pushback from President Jacob Zuma and some of his cabinet colleagues, he would still have a tough time fulfilling any fiscal consolidation promises. That is, if he remains long enough on the job to see them through. In any case, the authorities have already agreed to foot the bill of any university fee increase – peaked at 8 percent – for the 2017 academic year, about 2.5 billion rand ($180 million). Bear in mind, some 300 billion rand ($21.5 billion) was allocated to education in the 1.46 trillion 2016/17 budget, almost twice the allocation to health. The MTBPS and future budgets would likely need to allocate even more, if current agitations escalate: the ‘FeesMustFall’ protest might only just be the beginning, and could instigate other protests, more decent mass housing for instance. And there has been some sort of incrementalism by the student protesters in any case; seeking a reduction of varsity fees at first, then asking for free education for all and subsequently asking for decolonised education. Nonetheless, the ruling African National Congress (ANC) party could resort to populism to make up for losses it suffered at the local elections in August; even though I think the results do not require that it should: South Africans just want better service delivery.
Fiscal targets may be missed
The finance minister would expectedly set ambitious fiscal targets. Still, he would probably make upward revisions to the budget deficit projections he announced in February. Then, he set deficit targets of 3.2% of GDP for the 2016/17 fiscal year, 2.8% for 2017/18 and 2.4% for 2018/19. In my submission to Reuters, I suggest he might make revised deficit projections as follows: 3.5% of GDP for 2016/17, 3.0% for 2017/18 and 2.5% for 2018/19. Current trends and what they portend for the fiscal outlook do not support such optimism, however. My forecasts – published in September – for the likely actual levels of the budget deficit is 4.0 percent of GDP for the 2016/17 fiscal year, 3.8 percent for 2017/18 and 3.5 percent for 2018/19. The budget deficit was 16.7 billion rand ($1.2 billion) for August – the penultimate month before the end of the first half of the 2016/17 fiscal year, more than double the amount for the same period in the previous year. Mr Gordhan has no illusions about the current harsh realities, even as he remains optimistic, opining just last week that South Africa could still avoid a credit rating downgrade to junk status this year.
Politics won’t go away
Mr Zuma wants Mr Gordhan out of his cabinet. A pliant replacement might not be as fiscally responsible. Still, the president’s cabinet came all out in support of the embattled finance minister last week, after its members from the defunct armed wing of the ANC earlier took turns to deride him. Mr Gordhan is to be arraigned on fraud charges before a court on 2 November. In an unprecedented show of support, about 80 chief executives of leading South African companies have announced plans to be in court on the day. It also emerged that the prosecutor, supposedly independent, met with Mr Zuma a day before charges were brought against Mr Gordhan. If South Africa’s credit rating is downgraded to junk status in December, Mr Gordhan would almost certainly be removed. If the country is twice lucky – a downgrade was averted earlier in the year, the embattled finance minister may keep his job. But the question is this: which is more important for Mr Zuma: Getting Mr Gordhan out or averting a rating downgrade? Unfortunately, they are probably mutually exclusive. Hitherto, I thought it totally irrational that for the second time, Mr Zuma’s loyalists have tried to unsettle Mr Gordhan ahead of a crucial budget. Regardless, there are other ongoing battles within the ANC. The battle for the succession next year is already in full swing, with cadres already taking sides. There has not been a week in recent months when one controversy or the other relating to rifts within the ANC did not come about. Just this past weekend, the ANC’s chief whip in parliament, Jackson Mthembu, suggested the entire leadership, including himself, should give way for new hands, after having failed South Africans, in his view. Bear in mind, Mr Mthembu is responsible for keeping erring cadre MPs in line. Ratings agencies see these events and likely wonder how long the centre would hold.
The likely scenario I am increasingly convinced would play out is that Mr Zuma would remain in office for the remainder of his term. I also think he would see the back of Mr Gordhan, probably by a likely cabinet reshuffle before the end of the year. So even though I doubt Mr Gordhan would stay long enough to implement the likely ambitious targets he’ll set in this mini budget, he could at least take comfort in the knowledge that his efforts contributed in part to the improved but yet uninspiring growth outlook and continued market interest – albeit cautious – in South African assets, especially its debt in light of recently successful foreign borrowings. It must be said though that despite all these troubles, South Africans still have a lot going for them. Their budgets are presented as and when due, a finance minister can challenge a president, an anti-graft agency can be a thorn in the flesh of a sitting head of state, and a woman may become president and still keep her place in the kitchen and other rooms.
Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/politics-may-trump-mini-budget/