Treasury: How South Africa Can Deal With Ratings Breather

Treasury

Treasury

Recent ratings outcomes mean South Africa is given some time to fast-track growth-enhancing strategies to minimise the costs associated with negative sentiments, said National Treasury.

This may offset the increasing cost of borrowing, thereby enabling the government to continue with its spending plans, it said.

It explained that the SA government has accumulated a lot of debt in the past several years in an attempt to sustain the country through hard times created by the collapse of the US banks in 2008. Currently, the SA government spends close to R150bn in interest costs on its debt of over R2trn. This is almost the same as its budget for social grants and health.

“If the cost of borrowing money for government increases, it means that government will have to either cut social spending or tax the few people that are working even more, which is bad for the country,” said Treasury.

The government is hard at work to boost economic growth by working together with business, civil society and labour to demonstrate its commitment to translating plans into concrete actions that will ensure South Africa remains an investment grade country, according to Treasury.

“Efforts made by SA to keep an investment grade have paid off. The government, business, civil society, labour and politicians continue to work hard to build a foundation for faster growth,” it said.

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For the poor, it would mean that low-skilled work may be preserved for now since companies may postpone closing doors and moving businesses outside the country. For the middle-class and wealthy households, positive sentiments may translate into manageable debt costs, preserved value of their assets and no loss of disposable income. For business, positive sentiments are likely to result in investment and sustain the current employment levels.

Treasury admitted that currently, the SA economy is not doing well. Economic growth has been declining despite attempts to reduce structural constraints. On top of that many companies are not hiring, while others are expanding their businesses outside South Africa.

The drought also impacted growth and what Treasury calls labour market rigidities continue to constrain employment growth. It also pointed out that “recent political noise” has resulted in the weakening of the rand exchange rate, leading to higher prices of goods and services.

What Government should do

According to Treasury, Government should ensure that the spending ceiling is adhered to. The mini budget proposes R26bn in reductions to the expenditure ceiling over the next two years.

Proposed tax measures in Budget 2016 amounting to R43bn over the next two years should also be implemented and Government’s budgeted R987.4bn for infrastructure over the medium-term should also boost economic growth if spent efficiently. This includes continued large investments in energy, transport and telecommunications.

It is important for Treasury, however, that spending pressures do not result in a breach of the spending ceiling. The quality of spending must also be improved and be efficient. Costs must be monitored and controlled. Reforms relating to state-owned companies, labour markets, improving policy certainty and economic growth should also be fast-tracked.

At the same time, the business sector should ensure that the SMME investment fund of approximately R1.4bn is available to provide small businesses with access to finance and mentorship.

In Treasury’s view, the business sector should also continue to support government and labour on public platforms such as investor roadshows and in prioritising finding solutions to address constraints in sectors with high employment and export potential.

The business sector should, in Treasury’s view, ensure that the framework for private participation in public infrastructure spending is finalised.

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