On the Brink. Claire Bisseker

      Introduction

      Few countries in transition have managed to get a grip on their public finances as well as South Africa did after attaining democracy in 1994. The speed with which South Africa achieved fiscal stability earned the young democracy international plaudits and, over time, this feat was recognised by successive sovereign credit-rating upgrades.

      Now, just over 20 years later, as South Africa comes to terms with having been downgraded to junk status, much of that fiscal progress has been wiped out. This is mainly because of years of unsustainable spending on a burgeoning but unproductive government in a low-growth environment.

      In early 2013, I began asking whether South Africa was on a slippery slope to becoming a sub-investment-grade country. My conclusion was that although it would take a significant deterioration over several years for South Africa to lose its investment-grade credit rating, it was likely that, on current policies, the country’s creditworthiness would keep deteriorating.

      It was clear even then, before most people had heard about the Guptas and before the term ‘state capture’ had become part of the local lexicon, that unless South Africa found a way to accelerate growth and make it more labour-intensive, the country faced a slow, grinding descent from mediocrity to marginalisation – or worse.

      But, over the past five years, South Africa’s economic deterioration has been far more rapid than I and many other doomsayers initially envisaged. This was partly because the country’s slide was hastened by factors beyond its control, most significantly the slowdown in China and with it the collapse in the prices of and demand for South Africa’s commodity exports.

      Though the external environment has been extremely chal­lenging, domestic factors have weighed even more heavily on the South African economy. In addition to the cyclical commodity shock, South Africa has endured an electricity supply and price shock, a labour shock (in the form of the Marikana massacre and the five-month platinum strike) and, to top it all, in 2016, the worst drought in living memory.

      But, in the end, it was the deep, structurally embedded weak­nesses and trends – the deterioration of South Africa’s public finances and state capacity, extreme policy uncertainty and political contestation, fraught labour relations, skills shortages, and high logistics and mounting energy costs – that cemented the downward slide in economic activity and the country’s credit ratings.

      It was sadly predictable. Predictable, because a government that failed even to acknowledge these home-grown problems would also most likely fail to act on them until it was too late.

      What I didn’t count on was that in addition to the government’s neglect of the economy, President Jacob Zuma and his acolytes would actively sabotage it through a web of institutionalised theft. In the process, key ministries and state-owned companies have been captured and hollowed out, severely compromising the state’s capacity to deliver on its developmental agenda. In many respects, the state has gone rogue.

      The fear that things had deteriorated so massively that the country was close to falling over a fiscal cliff took hold during the latter part of 2015. In fact, the alarming prospect that South Africa might be headed for a debt trap was the initial impetus for this book.

      The health of a country’s public finances matters not just because this is something credit-rating agencies look at in determining a country’s creditworthiness and, therefore, the cost of borrowing. Rather it is because high and rising debt crowds out essential government spending, whether on economic infrastructure or on pro-poor programmes. In South Africa’s case, keeping the R180 billion social-grant system growing in line with inflation is essential for keeping 17 million beneficiaries out of dire poverty and maintaining social stability, though it is no substitute for employment.

      Fiscally, South Africa is testing its limits. The government has no further ammunition left with which to alleviate poverty or to stimulate the economy. It’s at the point where further tax hikes risk strangling growth, which would be self-defeating, where cutting expenditure risks harming service delivery, given that two-thirds of the budget is devoted to social spending, and where rooting out corruption appears impossible while Zuma or his proxy is head of state.

      Though further fiscal tightening will have an increasingly dampening effect on economic activity, the consequences of not acting – a further loss of confidence and multiple rating downgrades – would probably be worse.

      While Pravin Gordhan was finance minister, it was taken for granted that the country would avoid a fiscal crisis. This was a naive assumption. The Treasury understood that public expenditure was too high given the risks building in the fiscal system and was taking steps to restore the country to fiscal sustainability. But the real problem was that growth had been too low for too long. Though one man should have been powerless in the face of this problem, Gordhan inspired such confidence that in the end he was all that stood between South Africa and a junk rating.

      His replacement with a fiscal-policy novice, Malusi Gigaba, in March 2017 thus came at a dangerous time for the economy. Gigaba spent his first few weeks flip-flopping between accusing the Treasury of being captured by ‘white monopoly capital’ and praising its professionalism. Nor could he decide between Zuma’s war cry of ‘radical economic transformation’ and Gordhan’s vision of ‘inclusive growth’. In the end, Gigaba declared that the two policies were essentially the same thing, revealing not so much his real opinion as the untenable situation that Zuma had placed the country in.

      In its muddled thinking, the country has come full circle back to where it was in 2012 when the government tried to pretend that the irreconcilable New Growth Path (NGP) and the National Development Plan (NDP) were essentially the same thing. The upshot of that conflict was that for the next five years South Africa implemented no discernible growth policy at all.

      As long as this kind of ambivalence prevails at the top of government, South Africa will keep bleeding skills, jobs and capital until the country is just a shadow of itself. From a peak of 3,5% in 2011, South Africa’s economic growth rate had slowed to a mere 0,3% by 2016. Most economists expect growth to climb gradually to reach 2% over the next three to five years. But with the population growing by just under 1,7% a year, muddling along with very low or stagnant growth means the average South African is likely to experience very little income growth up until 2022.

      There are huge dangers in this. Rising poverty and unem­ployment are likely to heighten social and fiscal tensions. It is the kind of climate in which populism flourishes and confidence withers. The political noise is already deafening, with much of the blame misdirected at whites, business and capitalism for the government’s failure to meet people’s expectations.

      Tragically, the pragmatic NDP – which makes faster growth and job creation South Africa’s overarching national goal – now stands discredited along with capitalism in the minds of angry, young activists for having failed to deliver either growth or transformation. It is also disqualified in their minds for its association with men like Trevor Manuel and Gordhan (who, for