South Africa

Keeping track of any fiscal irresponsibility following the ANC’s poor performance in the recent local elections

Following the recent local elections in South Africa, where the ANC’s overall majority has dropped from about c.62% of the vote, down to c.55%, it was my view that given the high unemployment rate, low growth outlook, and still persistent inequality, that the ANC would start to pursue more populist policies. This post aims to keep track of this idea.

15/08/2016

Over the past weekend, the ANC had a conference for some ‘soul searching’ following the local election results. Their statement released following the conclusion of the seminar has placed focus on carrying out their 20 year Economic Development Plan first put together back in 2012. The Working Committee of the ANC was critical that the government seems to have forgotten this plan, and wants emphasis put back on it in order to overcome the high unemployment, low growth environment.

This, of course, will involve greater government spending. However the Treasury has already reiterated it’s stance that they will maintain fiscal discipline, stick to their goal of lowering the budget deficit, and keeping the debt-to-GDP ratio contained. So a roadblock already.

Furthermore, universities have told the government that fees need to increase by c.6% this year (I’m assuming to cover rising costs, which is rational considering inflation is about this rate too). The ANC has already said it will not raise university fees this year. So where will the extra money come from?

16/08/2016

Bit more detail on the above. The ANC has mandated the government to speed up the process of implementing a national minimum wage and said the nation’s universities shouldn’t announce any fee increases.

To pay for any increase in spending, the government may need to raise taxes and/or boost debt. Boosting debt will most likely lead to a downgrade, and raising taxes will only further alienate the urban middle class that shunned the ANC in the elections.

24/08/2016

While not directly related to fiscal expansion, it relates to the FinMin Gordhan. He was served with another letter from the police special investigations unit, the Hawks, to appear at a police station to answer questions. So the infighting between him and Zuma supporter factions picks right back up now the local elections are out of the way.

Furthermore, the chair of South African Airways (SAA) audit and risk committee, and one of its non-executive directors, has resigned. She worries the company will be liquidated, which for her personally would mean she can’t serve on her other boards. SAA hasn’t released a financial statement since 2014. It can not do so until it receives a new guarantee from the Treasury, but the Treasury has refused to grant the guarantee until the SAA board is replaced.

Also overnight, oversight of State Owned Enterprises (of which SAA is one), has now been turned over to Zuma. Previously it was the Deputy President incharge. What is likely preventing cash injections into SAA or Eskom is the Treasury – so this sticking point will need to be unblocked. If so, then the fiscal situation in SA will deteriorate rapidly. The current situation is a pressure cooker!

13/09/2016

Bit late on this one, but the Finance Ministry agreed to guarantee SAA at a cost of around USD350m. Not massive, but is this the first of many concessions Gordhan will begin making?