Treasury DG: ‘The state was captured’

After the budget was delivered at the end of February, National Treasury went on its regular roadshow to discuss the state of the country’s finances with international investors. What is said at these meetings is generally not fully disclosed, but judging by comments made by the Treasury’s director-general, Dondo Mogajane, at the University of Cape Town’s Graduate School of Business this week, some pretty frank discussions were had.

Mogajane delivered a presentation on how Treasury is stabilising the country’s finances, which one can reasonably assume was the same story he was telling international investors. And in doing so, he was not prepared to prevaricate on the question of state capture.

“The state was captured,” he said. “It’s not me saying that today. Everyone knows it.”

He also did not even need to be prompted to acknowledge where it was most felt.

“State capture was at play in Eskom,” said Mogajane. “It was centred around Eskom. More is going to come out through the state capture enquiry.”

The reason this has significance for National Treasury is that it was both a massive distraction and an inhibitor of growth.

“We wasted a lot of time because of state capture, instead of focusing on what we should do to grow the economy,” said Mogajane. “We wasted a lot of time in focusing on the wrong things, but I think now the time is right for us to go on.

“The private sector was also watching and what did they do?” he added. “They kept their money. They didn’t invest. And without investment there are no jobs, no infrastructure, nothing happens.”

Credit rating reprieve

Mogajane was however confident that the country is now on a much better footing, particularly after Moody’s kept South Africa’s credit rating at investment grade and changed its outlook to stable. As it is the last of the major ratings agencies to have the country’s rating at this level, this was a major reprieve.

“Moody’s has given us another window,” Mogajane said. “I’ve been quoted as saying that we have to defend the ratings with our lives, and I meant it.”

He insisted that the amount that the country is spending on servicing its debt is a material concern.

“We spend R180 billion a year on debt service costs, and that could increase overnight by R20 billion or R30 billion if we were downgraded,” he said. “Debt service costs should be zero to be honest. Keeping that number as low as possible is what motivated us to do the right thing.”

The decision taken by Moody’s also appears to have justified Treasury’s decision to be transparent about the state’s dire fiscal position in last year’s Medium-Term Budget Policy Statement (MTBPS).

“We wanted to make everyone aware that South Africa is in deep trouble,” Mogajane said. “Fortunately we were allowed to do that, because then there was a call to do something about it.”

This led to the fiscal consolidation that was presented in the 2018 budget, with the debt-to-GDP ratio projected to stabilise at around 56%.

“We’re often asked what our target is, but we don’t have a target range,” Mogajane explained. “What Moody’s bought into is that if we stabilise at a number and it is not shooting up through the roof as it was in the Medium-Term Budget Policy Statement, then they are comfortable.”

Institutional strength

Moody’s also expressed the view that the country’s institutions should regain their effectiveness following the change in political leadership. Mogajane acknowledged that there have been significant challenges at the South African Revenue Service (Sars) and that the recent steps taken by President Cyril Ramaphosa are the start of a process to restore confidence in that organisation.

He said that is is particularly important that Sars has the capacity to enforce tax compliance and not expose the country to the risk of losing revenue. In this regard the departure of many senior staff members may need to be looked at, and if there is a need to get them back, Mogajane expressed the hope that they would do so.

“If your tax administration is weak, you may as well close shop,” Mogajane said. “If they are not able to meet the collection target, then the fiscal framework won’t hold.”

Growth

The stabilisation of government finances is however only the first part of the solution. Mogajane made it clear that “South Africa’s challenge is growth”.

However, he believes that the opportunity is there to grow the economy far ahead of the 2.1% growth rate for 2020 predicted in the 2018 budget.

“There are low hanging fruit we just have to pick,” he said. “Just boosting confidence can bring an extra 0.5% growth. Telecommunications reform and releasing spectrum can bring another 0.6%. Dealing with barriers to entry can add 0.6%, and transport reforms another 0.3%. So if we do the basic things right we can easily grow at 3.5%.”

To really impact on unemployment however, South Africa needs to grow even faster than that. Mogajane believes this is possible, but only by bringing all stakeholders together.

“The challenge we have is do we all believe in one narrative?” he said. “What is the common vision? We are talking about a ‘new dawn’, so let’s converse together to see what will take us to 6%.”

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