Copyright businessday
In a few recent columns I’ve picked up on the theme of the ANC’s slow death and the reaction has been amusing. Some outside the party are upset that I am not calling the party “over” and “expired” already (it is not — yet). Some in the ANC seem deeply upset at anyone pointing out that the emperor has no clothes, while others chuckle at their colleagues in psychological denial. I was reminded of this topic again in recent weeks while road-showing around investors who seem perplexed that the ANC is not lashing out with a shock spending splurge before the local elections or radical moves on land or empowerment. One investor was unable to fathom why the ANC would not go all out at the medium-term budget policy statement this week to win the local government elections next year. Comparing SA with other emerging markets, this is indeed weird and unusual. But it’s also positive and the market is slowly waking up to the fact that the ANC itself, independent of being in the government of national unity (GNU), is more fiscally conservative than expected. Today’s medium-term budget is likely to be about holding the line and trying to do more within that by reducing expenditure elsewhere to optimise priorities ― dragging investors and ratings agencies to understand better fiscal outcomes in a low-growth, narrow fiscal environment. The ANC’s historic fiscal bad rap has been its inability to adjust expenditure to revenue shocks and state-owned enterprise (SOE) bailouts from governance and political leadership incompetence (now being mopped up by ANC ministers). The fiscus is complicated and there have been questionable choices over the years, such as how wage bill adjustments were dealt with. But these are not of the classic buy off the electorate with a spending splurge variety. Examples are few; the most recent one was the university fees issue a decade ago. It is perhaps unfortunate to consider underspending. Even if the Treasury targeted billions of rand at important swing municipalities, it is likely to go largely unspent. What is changing is a realisation by the cabinet – and therefore an ability of the Treasury – of the need to push through prioritisations in limited fiscal space with spending reviews (including cutting ghost workers). The most consequential thing the Treasury published a few months ago wasn’t the third budget but a detailed timetable — agreed to by the cabinet — of how this would happen through the medium-term budget. This is new. The real question is, so what? Moody’s and Fitch remain exceptionally grumpy regardless of what the Treasury says. S&P seems closer to the action with a better understanding of reforms and fiscal policy and the reality that tail risks from politics and social issues are deep out in the tail. This remains an issue with government debt pricing. Reams of academic research on why the yield curve is so steep inadequately factor in the psychological mischaracterisation of tail risks. It is entirely possible to construct an internally consistent scenario in which Jacob Zuma is president again in coalition with the EFF, hugely increasing spending through borrowing and expropriating land without due process. Equally possible is a scenario in which the National Health Insurance occurs tomorrow and the ANC turns to SOEs and developmental state spending. But what are the probabilities? How far out is the tail? What practical, institutional and logistical complexities must we wade through? The fiscal bogeyman may be at the door, but it is firmly bolted shut many times. Behind investors’ disbelief in the ANC not undertaking a fiscal splurge is a wrong assumption about probabilities. Do they update their probabilities after the medium-term budget when this doesn’t happen, as rational market participants should? This is the nub of the issue: Treasury fights on credibility. The probabilities have not been adjusted enough in the past and people are still hunting for the next negative thing, such as the claim that Paul Mashatile as president in 2028 would blow everything up. Bond yields have adjusted this year to lower inflation expectations as we progress towards a lower inflation target and as reforms advance, but the next leg is harder as real rate risk premiums need nibbling into. The argument that the Treasury holds the line even in a low-growth environment is fine, but it’s easier to argue fiscal is all fine when growth is more abundant, when we have two years of growth above 2%. Holding the macro-fiscal line is one thing, but in a society with SA’s problems more spending is always needed. The government seems firm on the right choice not to blow everything up by spending before growth, given the timeline uncertainty of reforms. But when growth expands the tax base, more higher-quality spending is needed in many areas. The argument about doing so sustainably will be easier then, and if the line is held today — perhaps rewarded with an S&P cherry on top at week’s end — the cost of borrowing may well be lower still, which is itself a public good to drive faster growth. Attard Montalto leads on political economy, markets and infrastructure at Krutham, an SA research-led consulting company.
