Sach's resignation could push South Africa to the ‘fiscal cliff’
Former finance minister Pravin Gordhan has called the resignation of senior Treasury official Michael Sachs an "absolute tragedy".
Sachs‚ Deputy Director General in the budgeting office‚ resigned amid allegations that he and other Treasury officials are unhappy about a plan that President Jacob Zuma allegedly intends introducing free University education for families earning under R350‚000 annually.
Zuma’s plan‚ which is said to be the brainchild of his daughter’s ex-boyfriend‚ Morris Masutha‚ calls on Treasury to avail R40-billion for free education.
No budgetary provisions have been made for the funding and Treasury staffers who spoke to TimesLIVE on Monday described the mood as "bleak". Many felt despondent‚ fearing that there is a parallel budgeting process taking place outside of Treasury.
An insider with knowledge of Treasury‚ said: "In government‚ it would appear to me that there is serious tension these days in between doing what makes sense politically to some politicians‚ versus doing what is professionally‚ technically and fiscally sound. Treasury was never opposed to the concept of giving financial support to learners who have the ability for university‚ but don’t have the means. But it has to be balanced with what is fiscally sustainable."
The Sunday Times reported that Sachs had threatened to resign if Zuma’s plan was implemented‚ because there had not been sufficient consultation or consideration of the long term ramifications.
Surprisingly‚ on Monday Zuma released the findings of the Heher Commission which finds the cost of free higher education unsustainable‚ hours after the news of Sachs' resignation became public.
Speaking to TimesLIVE‚ Gordhan said: "It's an absolute tragedy that a person of Sachs' calibre has decided to leave treasury".
He also alluded to the fact that the resignation was because Sach's ability to manage the budget was interfered with.
Treasury however said: "Sachs has expressed his interest to serve the public sector in a different capacity."
Gordhan said: "It is no mystery as to why this might have happened‚ despite the spin-doctoring that [surrounds] it".
He called the situation "reckless". "This is another activity that can sabotage our economic growth and fiscal credibility at time we can least afford it‚" said Gordhan.
The former Finance Minister said: "This is yet another dot that needs to be connected to the negative spiral that is developing in South Africa‚ as a result of not putting our people's interests first."
Economists have warned that this gives the appearance of instability in Treasury and could be the tipping point that leads South Africa to being downgraded by a third ratings agency - Moody's - to junk status.
On Monday‚ the rand fell from R14.40 to R14.54 against the US dollar.
This may have been linked to the belief that Zuma may go ahead with his plan for free education.
Economist Xhanti Payi said the appearance of instability in Treasury would spook rating agencies.
"If [the Sachs] resignation is due to interference in his job‚ it suggests that Treasury is not as stable an institution as promised.... This brings the possibility of a downgrade much closer.
"It is a worrying thing‚ that senior officials of his tenure are resigning in this environment when we need a commitment to good budgeting and management of debt levels and income."
Payi explained why it was so serious Sachs resigned: "The budget office is responsible for how we forecast our future spending and how we manage our debt levels."
South Africa was short of R50-billion in taxes‚ the medium term budget statement revealed last month.
Head of the Wits School of Economics and Business Science‚ Professor Jannie Rossouw said the resignation was "a serious blow to fiscal stability in South Africa".
He said Sachs had played an "important role in fiscal stability" and his resignation could "push South Africa to the fiscal cliff".
Rossouw said that while ratings agencies would not ordinarily pay too much attention to the resignation of a civil servant‚ under South Africa's current "precarious" circumstances‚ it was likely to cause concern.
Sygnia Asset Management Owner of Magda Wierzycka said on Twitter in response to Sachs' resignation: "I would beg all good people at State Owned Enterprises to stay at their posts. We need you now more than ever. You are the last barricade against wholesale looting."
In a statement issued last week Moody's said: "Political and social considerations remain an obstacle to rapid reforms‚ particularly in countries such as South Africa."
If all three ratings agencies downgrade the country to junk status‚ foreign pension fund managers have to pull their money from the country as they legally cannot invest in a country that is rated junk by all three agencies.
This will lead to a massive outflow of foreign funds from the country‚ economist Iraj Abedian explained‚ further weakening the rand and pushing up the cost of borrowing.
- Additional reporting Sabelo Skiti