The five tough tasks that are facing Pravin

The ’most huggable minister in the executive’ will need every ounce of his resolve when he tables the medium-term budget, writes David Maynier

Until recently the medium-term budget policy statement was a routine affair, largely left to the boffins slogging it out in the finance committee. But that is no longer the case.

Last year the then minister of finance, Nhlanhla Nene, was in full flight delivering the statement when all hell broke loose and his speech was disrupted by the stun grenades being used to disperse protesting students rampaging outside parliament.

It was chaotic. Opposition MPs responsible for commenting on the statement had to dodge the police, who had effectively locked us in, and then wade through the smoke, only to be informed that nobody was particularly interested in the medium-term budget, unless of course it was related to the student fees crisis.

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Since then the political situation has deteriorated significantly as the dirty war between President Jacob Zuma and Finance Minister Pravin Gordhan escalates, sucking South Africa into a political vortex.

Assuming he survives in the cabinet until Wednesday's statement, Gordhan will have his hands full trying to rescue an economy that is already on life-support, while simultaneously defending himself in a political knife fight with a one-man wrecking ball, Zuma.

Because of this the minister finds himself in a tight spot with very little fiscal space, and even less political space, to decisively respond to the economic crisis and the prospect of a sovereign ratings downgrade.

Gordhan will have to deal with at least five major challenges in his medium-term budget policy statement.

Economic growth

The economy is simply not growing fast enough to absorb the 8.9million people who are looking for jobs, or have given up looking for jobs, in South Africa.

The National Development Plan - much spoken about but little seen - envisaged economic growth rates of 5.4% a year, every year, for 20 years, between 2010 and 2030.

That is now impossible and economic growth rates will have to be revised down - more or less to 0.4% in 2016, 1.2% in 2017 and 1.6% in 2018, in line with Reserve Bank projections.

When it comes to economic growth there is very little the minister can do, given that the structural reform needed to boost economic growth and create jobs requires fundamental changes to economic policy.

The minister of finance, who has no control over economic policy development or its implementation, is usually left pleading unsuccessfully with cabinet colleagues to implement structural reforms outlined in the National Development Plan.

block_quotes_start The minister has been clear that one of the biggest risks to fiscal consolidation is the precarious position of state-owned enterprises.. and the massive loss-making crash landing of SAA block_quotes_end

However, with the economy flat-lining, Gordhan will have to show concrete progress on implementing structural reform, including supporting private sector investment, improving labour relations and reducing the cost of doing business in order to boost economic growth and create jobs in South Africa.

Fiscal consolidation

The minister has committed to a prudent, sustainable fiscal policy aimed at closing the budget deficit, achieving a primary surplus and stabilising debt levels that, after years of debt-financed consumption, are expected to reach R2.23-trillion, (50.9% of GDP) in 2016-17.

Debt service costs are now the fastest-growing expenditure item in the budget, and will reach R147.7-billion in 2016-17.

Gordhan has committed to a main budget expenditure ceiling of R1.15-trillion in 2016-17, to be achieved by cutting compensation of employees, reprioritising expenditure through cost containment, and procurement reform.

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However, since then:

• Lower-than-expected economic growth has made a significant revenue shortfall more likely;

• Cost-containment measures, which are important and send the right fiscal signals, have been resisted, resulting in modest savings; and

• New spending pressures have emerged, including in the higher education sector, as a result of the #FeesMustFall campaign.

This will put pressure on the fiscal deficit, which is already R139-billion, or 3.2% of GDP.

The minister will have to hold the fiscal line, fund new spending priorities, and fund the budget shortfall by:

• Imposing further expenditure cuts;

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• Reallocating declared under-spending, which totalled R3.18-billion in 2015-16; and

• Drawing down a portion of the unallocated reserve, which currently stands at R6-billion for 2016-17.

"Zombie" state-owned enterprises

The minister has been clear that one of the biggest risks to fiscal consolidation is the precarious position of state-owned enterprises, symbolised by Zuma's friend Dudu Myeni and the massive loss-making crash landing of SAA.

There has, to be fair, been some progress in dealing with the national carrier, which required a further R4.7-billion going-concern guarantee for 2016-17.

However, the minister will now have to take the next step and make a commitment, in line with recommendations by the presidential review committee on state-owned entities, to bring on board a private equity partner for SAA.

Student fees crisis

With campuses being torched across the country, the fees crisis looms large, despite an additional allocation of R4.88-billion to assist poor students in 2016-17.

Minister of Higher Education Blade Nzimande has undertaken to fund a 0% increase for all students from poor, working- and middle-class families who earn less than R600,000 per annum, which will require Gordhan to provide an estimated additional allocation of R2.5-billion in 2016-17.

We must accept the fact that poor students, despite assistance from the National Student Financial Aid Scheme, are battling and the long-term financial implications of this will only become apparent when we receive the final report of the presidential commission of inquiry into higher education.

Ratings downgrade: whether we like it or not, the ratings agencies are circling us like sharks

A ratings downgrade has the potential to turn an economic crisis into an economic catastrophe, as the cost of borrowing rises, capital outflows increase and the currency weakens, ultimately lowering economic growth and accelerating job losses in South Africa.

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Until now, the minister has been successful in convincing ratings agencies to give us the benefit of the doubt, and for that reason we hover, precariously, above "junk status", even though the markets appear to have largely priced in a sovereign ratings downgrade to junk status.

However, one gets the impression that, as political uncertainty spirals and the political risk increases, ratings agencies are becoming increasingly doubtful about South Africa.

The minister will have to demonstrate concrete progress in dealing with structural reform, fiscal consolidation, and zombie-like state-owned enterprises to hold off a sovereign ratings downgrade.

This is a huge challenge, not least because Gordhan is under siege by the national director of public prosecutions, Shaun Abrahams, who decided to whip out his pea-shooter and charge the minister with fraud.

However, although Gordhan may appear to be the most huggable minister in the national executive, he is tough and resilient, and has evidently decided to "burn the ships on the beach" and take a stand against Zuma and his most important clients, the Guptas.

Maynier, an MP, is the DA spokesman on finance and a member of parliament's standing committee on finance