South Africa is going to have to take some tough decisions in coming months to hit the brakes on the economy's speedy race to wreckage, according to leading economist Dr Thabi Leoka.
A week after Finance Minister Malusi Gigaga delivered his maiden "mini-budget" speech, the threat of another downgrade from ratings agencies next month still looms large and could risk "enormous amounts of money leaving the country," said Leoka.
Moody's on Monday criticised Gigaba's medium-term budget policy statement (MTBPS) as signaling a "departure from earlier consolidation efforts", and implied that another ratings downgrade could be on the way in late November from Moody's and S&P.
According to Business Day on Monday, economists believe that a junk rating of domestic bonds could lead to South Africa being kicked off the World Government Bond index, and also to sales of R80-billion to R130-billion worth of local bonds.
In basic terms, what this means is that government would face another knock to its budget and the economy-at-large, as more investors potentially walk away.
"Because as a country we don't really save money, we rely mostly on foreign flows or investment, which especially includes investors putting money into South African bonds. This money effectively translates to much of our national budget, which funds everything we do, from infrastructure development to paying public sector workers or even grants, to an extent," she said.
Leoka says this outflow is hugely significant, because it means the Treasury is left to rely on the taxes it collects to "fund the R50bn [budget] shortfall", which in itself was largely attributed to declining tax revenues in the first place.
Dirty politics and difficult decisions
The minister of finance is now left with very little room to manoeuvre and may have to consider making unpopular and politically unfeasible choices, if the economy is to get back on the right track, she said.
In simple terms, he has to somehow achieve the following simultaneously: slow down and even reverse disinvestment, while also finding more money (which could alternatively or simultaneously mean spending far less as government) to lessen national debt.
Leoka says at this extremely tough moment for the South African economy, one option could be to increase value-added tax, or VAT, by even a single percent to help close the gap.
"I would suggest we increase VAT even by 1%, as ours is one of the lowest in the world, and because it would be a great contributor and close the shortfall, which we recently found out is over R50-billion. But it is very difficult in an election year," she said.
In response to whether this is feasible and desirable, especially for consumers who would end up paying more on goods and services (which could further slow the economy as whole), Leoka said the country has to take "hard knocks", given the dire circumstances.
"It's not possible to not feel the pressure," she said. "If you have a to reform a country, you don't do so while it's growing. Reform itself is a way of [temporarily] slowing growth, so that you can correct some of the structural problems".
If I were the minister...
Leoka stressed that, while the economy finds itself in dire straits, if government cleaned up its act and steered away from unaffordable policy changes, the costs to citizens of a slow economy may not be as high.
"Apparent corruption, state capture and reckless expenditure in general make it difficult for politicians to claim that there's no money to be spent on its key social programmes; for example, free education for lower incomes students and the so-called 'missing middle'," she said. This is important, especially "when money is leaked, used inappropriately, or stolen" at its current scale, she added.
Leoka also warned against nuclear ambitions, saying spending potentially over a trillion rand on "clearly unaffordable" nuclear power would go against precisely what the minister needs to do now with urgency. Namely, convince investors locally and abroad that the country is committed to fiscal consolidation and credible efforts to eliminate corruption.