Gordhan laid foundations for SA’s long-term success

Finance Minister Pravin Gordhan’s 2016 Budget is not enough to pull the country’s sovereign credit rating away from the brink of being downgraded to junk status.

Gordhan laid foundations for SA’s long-term success

Credit: INDEPENDENT MEDIA

Finance Minister Pravin Gordhan's budget message was one of long-term stability and concern for the economic well-being of South Africans, rather than short-term extreme adjustments, says the writer. File picture: Leon Lestrade, Independent Media

Finance Minister Pravin Gordhan’s 2016 Budget is not enough to pull the country’s sovereign credit rating away from the brink of being downgraded to junk status. In order to do that, Gordhan would have to raise taxes even more and curtail his generous allocations to higher education, economic infrastructure, social protection and health services. But foreign direct investment (FDI) may feel encouraged by his commitment to long-term economic stability.

Rating agencies are not concerned with social spending or the well-being of the average South African. Their mandate is simply to evaluate the ability of the government to pay back its debt and, therefore, determine the risk of lending to it. They primarily look at government’s ability to raise tax revenue and whether it is enough to cover the planned spending – if not, the country is left with a budget deficit and needs to make up the difference with borrowed money.

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Current government debt levels are hovering just under 50 percent of gross domestic product (GDP) and the Treasury forecasts that they will stabilise around 46.2 percent in 2017/18 and decrease thereafter. Moody’s and Fitch predict that they will exceed 50 percent this year and continue to edge upwards. The key difference is that the rating agencies do not trust that the government will reach its targets and raise tax revenue sufficiently to reduce the debt-to-GDP ratio. GDP growth for 2016 has been revised down to 0.9 percent.

But while Gordhan’s light touch on taxes and generous increases in government spending this year may not have pleased the rating agencies, the Budget will catch the attention of long-term investors.

FDI takes a different stance on a country’s well-being and is not as concerned with short-term indicators and the government’s internal finances. FDI makes its returns on long-term, stable growth and is more interested in levels of consumer spending, business confidence, growth in entrepreneurship, improvement in economic infrastructure and predictability in government policy. Gordhan’s Budget is rich with examples of these.

Over the next three years the government plans to spend R870 billion on public sector infrastructure with a strong focus on supporting the work of the private sector. This includes R292bn on transport and logistics (such as better service on the freight and coal train lines), R54bn on education infrastructure and a special project to get broadband internet into remote areas of the country. State-owned companies (SOCs) are being cleaned up to weed out redundancy and close up the cracks that are allowing for the misuse of funds. SOCs that no longer contribute to economic growth or stability will be phased out and those with overlapping mandates will be merged.

The Chief Procurement Officer has been given larger responsibility to investigate the procurement producers of SOCs. Along with the mandatory use of the new e-tender portal this will help to curb corruption and increase accountability in government spending. Where possible, partnerships will be sought with the private sector to lighten the load on the state and improve the rigour and efficiency of operations. One example of this is the expansion of the Independent Power Producer Procurement Programme that has been successful in attracting private investment into renewable energy generation. The programme will now include coal and gas power projects to allow the private sector to play a larger role in South Africa’s energy security.

Regulation is being targeted to ease the flow of business into and within South Africa. Administration costs and complexity for small businesses will be reduced and a new investment promotion agency will be set up to streamline procedures in the financial sector. The Development Bank of Southern Africa will increase lending to development projects by R48bn over the next three years.

The Budget’s proposals are a return to what fiscal leadership should look like; let government play the role of the facilitator and build the platform from which others can create growth. No investor is going to change their behaviour overnight – the Budget’s policies remain proposals and will need to be implemented correctly – but the message Gordhan is sending out is one of long-term stability and concern for the economic well-being of South Africans, rather than short-term extreme adjustments. This year will be a tough one, but the foundations for long-term improvements are being laid.

* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.

** The views expressed here do not necessarily reflect those of Independent Media.

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