South Africa’s renewed commitment to deliver structural reforms will lead to more favourable assessments of its junk-rated debt and help regain the confidence of the ruling party’s supporters, Finance Minister Enoch Godongwana said.
The former labour unionist, and key ally of President Cyril Ramaphosa, delivered his first mid-term budget this week. In it, he pledged to accelerate structural reforms to bolster economic growth and address the deterioration in public finances caused by a decade of state overspending, mismanagement and corruption.
The government is targeting “concrete” reform success by the time of Ramaphosa’s next state-of-the-nation address, Godongwana said. The president usually makes the speech in mid-February.
“We mean business,” Godongwana, 64, said in an interview Thursday. “My challenge at the moment is to push for us to develop a track record of implementation. That’s what we need to do and once we do that, we’re going to begin to develop credibility.”
With South Africa’s credit ratings at the lowest levels since they were first assigned almost three decades ago, reform momentum could see Moody’s Investors Service and Fitch Ratings upgrade their outlooks to stable from negative toward the end of next year, Godongwana said. The country’s sovereign risk premium — a measure of the increased cost investors pay to hold South African debt — is set to improve to 3.1% in 2023 from 3.5% this year, according to National Treasury estimates.
Implementing reforms may prove easier said than done.
The government has formally adopted five blueprints to boost economic growth and job creation since the ruling African National Congress won South Africa’s first all-race elections in 1994. Efforts by Godongwana’s predecessors to usher in policy changes have been stalled by powerful vested interests, leaving the economy stuck in its longest downward cycle since World War II and more than a third of the workforce unemployed.
Godongwana’s leadership may herald change. He’s the first finance minister to concurrently chair the ANC’s economic transformation committee.
“From a political perspective, it gives me clout on both sides,” he said. “It has worked nicely.”
The ANC’s worst electoral performance last week since the end of White-minority rule could either deepen factionalism within the party or catalyse positive changes before national elections scheduled for 2024. Demands by groups within the party that already oppose austerity may intensify, potentially spawning a debt crisis that would exacerbate poverty in one of the world’s most unequal societies.
In his budget, Godongwana resisted calls by civil-society groups for increased welfare spending and for the introduction of a basic income grant — a policy business organisations say is unaffordable. The Treasury will only set aside additional funds for social relief if public finances improve by February, it said.
With the so-called social wage — comprising spending on health, education, housing, social protection, employment initiatives and local amenities — set to average 59.5% of non-interest spending amid significant fiscal constraints, Godongwana is reluctant to commit to costly, more widespread welfare measures.
The government will also resist pressure to increase spending to claw back voter support in the lead-up to the national election, Godongwana said.
“We have been increasing social grants over the years up to about 18 million people, but as we increase social grants, our electoral outcomes are disappointing,” he said. Voters are “not interested in social grants, they want us to meet the basic, bare necessities” such as providing electricity and water, the minister said.
That stance is likely to please investors, who’ve come to know Godongwana as an opponent of populist policies advocated by Ramaphosa’s predecessor, Jacob Zuma. He’s been an advocate of market-friendly policies, and cautioned against the ANC’s proposals to nationalise the central bank and change the constitution to make it easier to seize land without compensation.
With R341 billion ($22.3 billion) available to spend over the next three years, the government intends to build support before the election by investing in water, sanitation, power and other infrastructure, Godongwana said.
“Our challenge is going to be the quality of that spend,” he said. “It is not going to be grants.”