A bulker TK Majestic, carrying grain under the UN’s Black Sea Grain Initiative in Istanbul, Türkiye. Tough global financial conditions are exacerbated by rising geo-economic fragmentation, and the growing costs of climate change, says the writer. Picture: Reuters
Whatever feel-good factor the government of President Cyril Ramaphosa may have harboured in hosting the 15th BRICS Summit and the precursor state visit of Chinese President Xi Jinping in August – no doubt touted as a diplomatic triumph given the expansion of the Bloc by six new members – quickly dissipated as the ruling ANC is confronted with the harsh reality of the state of the country’s economy and public finances, especially its onerous and growing sovereign debt burden.
The President no doubt as he was showing his VIP Chinese guest the Jacaranda lined splendours of the Union Buildings and Pretoria, was buoyed following the apparent exoneration by SARB that “there was no perfected transaction and thus the SARB cannot conclude that there was any contravention of the Exchange Control Regulations by Ntaba Nyoni Estates or for that matter by the President in respect of the foreign currency allegedly stolen from (his) Phala Phala farm on 9 February 2020.”
His Minister for Electricity Kgosientsho Ramokgopa in contrast was marked out for his alleged coyness in disclosing details of the memorandum of co-operation signed with eight Chinese companies aimed at “enhancing South Africa’s energy security through infrastructure and technology development, human capital development and research”.
Ramokgopa in an interview with SABC strongly rebutted any suggestion of lack of details and that there are strings attached to the agreement stressing that the Chinese companies as an act of good faith are donating 552 alternative energy units ranging from 6 kW to 200 kW generators to help ease the impacts of load shedding especially in rural areas.
Another visitor to Cape Town was Gita Gopinath, the first deputy managing director of the IMF and keynote speaker at SARB’s Biennial Conference last Friday.
Far from being a doom monger like some pundits recently warning that the country is sleepwalking into a debt trap and in terminal decline, her message is clear and present, but measured.
Global financial conditions are tougher for all economies, especially emerging markets. These are exacerbated by rising geo-economic fragmentation, and the growing costs of climate change. Together, these changes are transforming the economic landscape and making the world more volatile and uncertain.
Her recipe for navigating these external conditions which are interconnected and impact internal structural reforms, may be music to the ears of Finance Minister Enoch Godongwana, but to the more radical leaning factions within the ANC, it would be anathema.
The reality is that inflation will continue to be a problem for the global economy, and she expects global interest rates to remain high for quite some time.
This translates into a higher cost of financing especially for emerging economies.
“The pandemic and Russia’s war in Ukraine have raised legitimate concerns about supply chain security and broader national security. And indeed, policymakers should act to improve their economic and financial resilience. However, it must be acknowledged that increased resilience comes with a cost. More disturbingly, we are seeing an increase in policy actions around the world that, if continued, pose a serious threat to global prosperity,” she warned.
These threats include rising protectionism, trade restrictions – some 3000 restrictions were imposed in 2022 (three times those in 2019) and FDI is now driven by geopolitical preference rather than geographic distance.
Despite the efforts of the new Blocs such as BRICS, the world is becoming fragmented. In the wake of the Russian exit from the Black Sea Grain Initiative, another BRICS member state, India imposed export restrictions on non-Basmati rice.
“Our simulations of the impact of trade fragmentation find that while a few EMs could benefit, most will lose - including South Africa, with a hit of 5% of GDP,” she observed.
This would translate into higher food and fuel costs and a further rise in the cost of living.
South Africa, like other countries, is vulnerable to climate change as the devastating floods in the Eastern Cape and KwaZulu Natal have shown. For South Africa, the World Bank estimates climate financing needs of 4.4% of GDP per year between 2022 and 2050.
This scale of costs, she warns, “poses an exceptional challenge.” Her recipe of accelerating domestic resource mobilisation and rebuilding fiscal buffers is easier said than done given the unique recent historical experience of South Africa and its emergence from over two centuries of colonialism and apartheid rule.
The IMF has repeatedly mentioned the mantra of fiscal buffers through increased tax revenues, more effective collection, public sector wage restraint and greater spending efficiency.
Increasing tax revenues by 30% and the Tax-to-GDP ratio by 5%, as she suggests will be tough especially for an already-battered middle class, which bear the brunt of the tax burden.
But the spending on social grants and safety nets beyond the most marginalised and vulnerable sections of society continues unabated, and public sector wage negotiations at best have been contained merely for the short term perhaps with an eye on the general election looming in 2024.
The words notably bereft from Ms Gopinath’s address are the ‘C’ words – corruption and cadre deployment, which has ravaged the body politic and economic of the South African state, its agencies, municipalities for over a decade.
Public debt remains an Achilles Heel. In the IMF 2023 Article IV report in June, staff stressed that “South Africa has weathered the most recent shocks relatively well, thanks to its strong fundamentals, but far-reaching reforms remain essential.”
These included reducing the fiscal deficit to 4% of GDP in FY23/24 and to 3.2% of GDP by FY25/26, largely through increased tax revenues and a curb on public expenditure. The caveat is that despite the declining fiscal deficit, public debt, said the Fund, is projected to increase from 71.4% in FY22/23 to 73.6% of GDP in FY25/26 due to the government’s debt relief to Eskom, the weakening mineral revenue, wage bill pressures, and rising debt service.
Not surprisingly, Ms Gopinath warned that in the deteriorating global financial climate, interest payments on public debt owed by Emerging Countries are set to rise significantly from around 11% of revenue in 2019 to around 14% by 2028. This will reduce fiscal space for critical spending needs and put pressure on debt sustainability.
“In South Africa, for example, the interest bill is forecast to increase from about 19% of revenue this fiscal year to 27% of revenue by FY28/29—about twice this year’s budget allocation for health,” she added.
South Africa is also characterised by its subdued GDP growth rate. S&P Global, using the new Nowcasting model of measuring what’s happening in the economy today or in the near past or future, based on Purchasing Managers’ Index (PMI) data, forecast a Q2 2023 GDP marginal growth of a mere 0.04%. Official GDP estimates in South Africa have a particularly lengthy lag time in their publication, generally releasing after two months after the reference period.
The Nowcast GDP forecast for Q1 2023 was 0.41% compared with the official National Treasury figure of 0.42%
Parker is an economist and writer based in London.
Cape Times