When Minister of Finance Pravin Gordhan tables his medium term budget policy statement (MTBPS) in parliament tomorrow, (Wednesday, October 24) he will do so in a quagmire of domestic and global economic uncertainty. Coming in the face of a tranche of negative global economic news, domestic labour turmoil, political uncertainty and very recent credit downgrades, it is probably his toughest assignment yet as holder of the country’s purse strings.
The MTBPS, also popularly known as the “mini budget”, is intended to give an update on the government's spending plans for the next three years. It is usually accompanied by an assessment of the general economic environment and trends in the medium term future.
Minister Gordhan, known for his cautious and conservative approach, will be hard pressed to come up with meaningful figures. For one, it is still unclear what impact the present labour unrest will have on the income of the fiscus, and consequently on its spending capacity.
At the same time the International Monetary Fund (IMF) the week before last warned that the continuing debt and eurozone crisis remains a persistent threat to the global economy. There are again increasing fears for the stability of the global financial system.
In a report on global financial stability, released days before an IMF meeting of the world’s finance ministers in Tokyo, the organisation warned that unless urgent policy measures are taken in Europe, mounting pressure on banks could result in “asset shrinkage by as much as US$2.8 trillion to US$4.5 trillion” by the end of 2013.
In addition IMF sources expressed serious concern about the threat that high United States and Japanese national debt poses to the global economy. The organisation was unable to see how the US could manage to deal with its major budget problems in the medium-term and warned that in the short term the US presents a threat to the global economy.
Last week the Organisation for Economic Cooperation and Development (OECD) reported that real GDP growth among its member states -- which constitute South Africa’s largest export market -- slowed in the second quarter of 2012 to 0.2% from 0.4% in the first quarter.
The overall picture is one of a danger that large regions of the global economy could slip back into recessionary territory as early as the final quarter of 2013. This could have a strong negative impact on South Africa’s exports and, by implication, government income.
Last week started off for South Africa with the news that the international ratings agency Standard & Poor's (S&P) had cut the country’s credit rating by one notch the previous Friday, following a similar cut by Moody’s in September.
S&P also warned that strikes in the mining sector are likely to feed into the political debate in the run-up to the 2014 general election, causing uncertainties about the ruling ANC’s future policy frameworks.
What happens with policy framework at the ANC’s policy meeting and elective conference in December can also impact on the ratings agency Fitch, which is expected to make a call on South Africa after the gathering in Mangaung.
There might indeed be even more downgrades in the pipeline. That in itself, if it happens, will worsen the situation by increasing the cost of government debt.
The rolling unrest, especially on the so-called platinum belt, additionally exposed complicated social problems related to issues such as rapid urbanisation and the system of migrant labour. To this can be added other socio-economic issues like high unemployment, pressure on education and health services and service backlogs at local government level.
Minister Gordhan will be seriously challenged in trying to address the social and developmental backlogs without deviating from his policy of prudent financial management. And he will have to do so in an environment where fiscal room to manoeuvre is shrinking.
At the same time he has to strive to create enough confidence to persuade private sector investors and major companies, who are reportedly sitting on mountains of cash as they ride out these highly uncertain times, to invest in economic expansion.
He will have to do so while all the global and domestic uncertainties and variables make guesswork unavoidable.