MTBPS shows fiscal prudence despite many obstacles

Minister of Finance Pravin Gordhan delivered this year’s Medium Term Budget Policy Statement (MTBPS) 2016 to Parliament on 26 October.

The MTBPS is a government report providing information on the country’s economic context, fiscal objectives and spending priorities over a three-year period. Given South Africa’s current economic and political context, this year’s MTBPS was one of the most anticipated since the annual statement was launched almost 20 years ago.

The National Treasury expects real GDP growth of only 0.5 per cent this year and a below-trend 1.3 per cent next year, due to the impact of an uncertain global economy and low investor confidence. Echoing recent comments by the South African Reserve Bank, the minister indicated that this low level of confidence stems from elevated political risk and concerns about the ability of public institutions to make good decisions.

To achieve faster economic growth, the country needs more private sector investment, but on a positive note, the government is pleased with efforts in the labour sphere resulting in the number of working days lost to strikes declining, as well as a depreciation in the rand boosting the country’s export prospects. This should support greater investment.

If, however, the GDP growth remains below 2 per cent – the country’s current potential growth rate based on known constraints – the government will not be able to sustain current spending based on its policy directives.

Growth is limiting the speed at which Gordhan can narrow the budget deficit, as an aggressive fiscal consolidation drive could see the economy stuck in a low-growth trap.

The MTBPS is frank about what these growth obstacles are, and they are all significantly influenced by the government’s activity and policy, namely, infrastructure bottlenecks, low levels of competition in certain markets, a volatile labour relations environment, regulatory constraints, red tape, inefficiencies in State-owned enterprises and economic policy uncertainty.

Success in reducing these obstacles depends on how well these efforts are coordinated and put into action.

S&P Global Ratings currently rates South Africa ‘BBB’ (the lowest possible investment-grade rating) with a negative outlook, and any adverse adjustment to this assessment would see the country moved to non-investment grade.

S&P will publish its latest official review of the rating during the first week of December.