SA faces Argentina-like debt crisis warns Mboweni

South Africa is heading Argentina’s way on the fiscal front if “serious measures” are not taken to rein in spending,bring down its debt and “to close the mouth of the hippopotamus,” Finance Minister Tito Mboweni has warned.

Speaking during a Stellenbosch University webinar marking the centenary of the institution’s economics department Friday, Mboweni stressed that tough decisions lay ahead for South Africa, otherwise the country would “head Argentina’s way” in a few years.

The stark warning Mboweni comes ahead of his Medium-Term Budget Speech, set for October 21, which will map out the country’s expenditure plans for the next three years.

South Africa’s finance minister spoke frankly about the state of the economy, which was already in a recession prior to the nationwide lockdown that started in late March to stem the spread of COVID-19.

Mboweni warned that a “fiscal crisis is on its way by 2024/25” if serious action is not taken by government to effectively address the widening gap between revenue and expenditure.

“What bothers me most is what I refer to as the hippopotamus’s mouth … where revenue is declining while expenditure is going up. [We] have to close this mouth of the hippo.”

The finance minister said tax revenue for the year is expected to contract by over R300 billion.

“It is a very serious situation that we are facing. We can no longer live beyond our means,” he said, adding that he has shared his concerns with Cabinet too.

“I do not think the medium-term budget policy statement will be popular, particularly as we will deal with things like South African Airways and other state-owned enterprises.”

“We are headed for a fiscal crisis. Non-residents are selling South African bonds at an alarming rate,” he added.

If domestic banks and institutions were to remain the largest holders of SA bonds a possible fiscal crisis would contribute to a “banking crisis and a financial crisis,” said Mboweni.

“If we head towards a fiscal crisis, then we have a sovereign crisis, and then a banking crisis … We can no longer live beyond our means.”

He warned that his upcoming medium-term budget “will not be a popular one” in the context of “dealing with things like SAA and other state-owned enterprises.”

“Before the lockdown, we were already in a technical recession, so revenue was also down from the point of view of the fiscus. Then coronavirus hit us… The ban on the sale of tobacco and alcohol actually made people in the tobacco and alcohol industry extremely rich – they shot up prices. The underground market was active.”

Don’t cry for me Argentina

Mboweni said he had a meeting with Harvard professors two days ago, and they warned SA would be “heading the Argentina way.”

“I had the former governor of the central bank of Argentina on the line, he said, ‘I have seen that movie before, and you guys are going that way.’”

Argentina secured a $57 billion loan from the International Monetary Fund in 2018 – it is said to be the largest loan in the history of the institution. The country has suffered multiple economic crises and has entered into 21 IMF programmes.

Economic recovery plan

Mboweni made no mention of the government’s much-anticipated economic recovery plan, which will be aimed at boosting the economy post the Covid-19 economic fallout.

President Cyril Ramaphosa said last weekend that the plan is set to be released soon and reiterated that infrastructure investment will be a key cog.

Mboweni said when it comes to “policy coordination” in the government system the central coordinating mechanism is the Cabinet. “Eventually things come to the Cabinet, that is where policy coordination takes place,” he explained.

While the “mechanism” is there, Mboweni said the question is whether the correct policies are being coordinated.

Using the example of spectrum, a topic spoken of for years, he noted that decisions have been taken by Cabinet, but no progress has been made.

“You guys need to understand politics. Why is it not moving? It’s a political problem, not a coordination problem.”

It remains unclear whether some details of the recovery plan will be revealed during Mboweni’s mini budget speech on October 21.

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