Ep 137: The Reality Behind South Africa’s Fiscal Outlook - Dr Azar Jammine

Michael Avery (0:00)

Welcome to The Monocle Banking Podcast, curated by Monocle Solutions. As always, I'm your host, Michael Avery. Before we get into today's conversation, as leaders in artificial intelligence implementation, Monocle is currently running an anonymous AI sentiment survey. Interesting that they want to better understand how people feel about AI and its growing influence on both our personal and professional lives. As AI continues to evolve, opinions range from fear and uncertainty, to optimism and excitement about its potential.

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Now, there's an odd thing happening in South Africa's economy. For the first time in a very long time, the fiscal story is actually getting better. When Enoch Gondengwana became finance minister back in August of 2021, he inherited a government still reeling from COVID, the July unrest, a budget deficit approaching 8% of GDP, debt north of 4 trillion rand, and an interest bull steadily swallowing the budget. Five years later, the deficit has narrowed substantially. Government is running a primary surplus. The debt to GDP ratio has finally stopped ballooning. Credit ratings agencies have started upgrading South Africa again. And the cost of borrowing has at least until the latest global bond market turbulence been moving in the right direction, which deserves acknowledgement.

But, and there's a pretty big but, there's another number just which refuses to cooperate, and that is growth. Treasury began the year expecting the economy to expand by 1.6% this year. Instead, we saw GDP contracting in the second quarter, and we also saw the IMF come out, and pretty much keep us at 1% for the year. So it leaves us with a really difficult situation ahead of the medium-term budget policy statement, which is coming up on the 21st. Has South Africa solved enough of the fiscal problem to offset these concerns about growth? I think the answer is quite clearly no. We've got to get the economy growing again. But to find out what we can expect from this mini budget, we've invited Dr. Azar Jammine, Director and Chief Economist at Econometrix on to the show this week. Azar, welcome. Great to chat to you. Let's just start with the big picture. We've got to recognize that the Finance Minister did inherit quite a lot, taking over from the state capture years. And in terms of his fiscal house, has tried to get everything in order, but interest was consuming roughly 21 cents of every round of revenue. Five years later, do you think we can start to say it's a genuine fiscal turnaround just yet?

Azar Jammine (3:02)

I don't think we can say that it's a genuine fiscal turnaround quite yet, primarily, and you've indicated it in your preamble, because of the very low economic growth rate. At the moment, the situation is looking reasonable and fairly stable. But we have been enormously helped by a doubling of precious metals prices in the past two years, which is generating an increase in government revenue from the Mayans at a rate that is well in excess of what might have been anticipated. But that cannot be relied upon to continue, as it is already we have seen a bit of a pullback in these precious metals prices. They are still double of what they were a couple of years ago, but I think the warning signs are there. If the world economy goes into a major downturn, it's possible that those prices may not be able to sustain even the current high levels that exist. And then on the welfare side, the government is coming under tremendous pressure at the moment. And it might be this government of national unity, but even the forthcoming government in a few years time will face the same thing of wanting to expand the net of social grants to include those who have been getting the Social Relief of Distress Grant, who do not have access to other forms of social grant and have in the last few years since COVID been rescued.

One year at a time by the government agreeing to continue extending the Social Relief of Distress Grant, there's a lot of pressure to keep that going indefinitely, which means an extra 40 billion rand or so per year that the government would need to find.

Michael Avery (4:54)

I mean, that is huge pressure. And I was going to ask you, if you look, a lot of people point to the fact that, you know, underneath the debt number, we've moved from primary deficits into a primary surplus of almost 1% of GDP, which I mean, it looks significant until you look at that situation you've just described. Can you sustain a 1-2% primary surplus for years in a democracy with unemployment above 30%?