NWU Vaal alumnus and economist talks about minister's game plan

Annette Willemse -- Fri, 03/06/2015 - 09:12

NWU Vaal alumnus and economist talks about minister's game plan

Well-known economist, researcher and economic commentator Ettienne le Roux, took to the stage as the guest speaker at the first Vaal Triangle Campus’s (NWU Vaal) Alumni Business Breakfast for 2015. His presentation on the National Budget Speech followed just two days after Finance Minister – Nhlanhla Nene, delivered his National Budget Speech on 25 February 2014.

Ettienne Le Roux Ettienne Le Roux

Le Roux – who is an alumnus of the Vaal Triangle Campus, presented an address aptly themed: “SA Budget Speech: talking rand and cents.”

Historical overview

To start off the discussion, Le Roux provided guests – which included members of the academic fraternity, local business and industry leaders as well as fellow alumni, with a historic overview of the South African economy. For the past five to six years, according to Le Roux, South Africa found itself on the path of an unsustainable fiscal course.  This, together with the recent downgrading of SA’s investment credit rating during the latter part of 2014, does not bid well for the country’s economic climate. Add to this low GDP (Gross Domestic Product) growth, current account deficits that remain high, a sizable general government debt and the adverse effects from strikes in the platinum and manufacturing sectors and electricity supply constraints it becomes clear that “it is absolutely critical” that South Arica change its fiscal course and revert back to fiscal prudence, explained Le Roux.

According to Le Roux, who is a Chief Economist at Rand Merchant Bank, a correlation can – over time, be drawn between Minister Nene’s approach and that of former Finance Minister, Trevor Manuel.  “I believe Minister Nene is the right man for the job,” said Le Roux and added that with the right “game plan” the South African economy can recover to the levels it experienced in the period from 2005 to 2007. During this time aspects such as tax revenue and government spending in relation to GDP contributed to favourable growth and henceforth proper fiscal discipline. Today, the picture looks a lot different.

The South African economy was not spared the brunt of the global financial crisis in 2008/9 and as a result the economy experienced a state of recession and now, six years later, the economy is still underperforming. In short: “The revival that followed the boom was disappointing.” According to Le Roux various reasons can be given for the underperforming economy, but apart from global factors, commodity price increases and a weaker rand many of the impacting factors were “self-inflicted wounds”.

Current situation

Sadly, according to Le Roux, budget deficits have become the norm in South Africa for the past three to four years and although the tax to GDP ratio is not very different to the 2003 situation, the economy is still performing on levels lower than the peak levels before the global crisis. “The economy is in a structural rut and if you crunch the numbers for the past five consecutive years, it becomes very clear that we have a problem at hand,” said Le Roux. This “problem” is also evident when one looks at how quickly South Africa’s financial markets deteriorated between the periods of 2006-2014/15. “Budget surpluses decreased and the 15% deterioration in the market represents the worst performance of all emerging economies  - in fact, some emerging markets managed to improve their debt situation considerably within the same time span,” said Le Roux.

Currently the South African economy mirrors a 46% debt to GDP ratio and according to Le Roux this means – in simple terms, that South Africa is forced to pay more on servicing its debt. “Six years ago the South African economy spent R50 billion to service its debt, today that amount has increased to a staggering R110 billion and as a result more tax payers’ money are channelled to pay interest on the accumulated debt. This is a very unsustainable situation…,’ explained Le Roux. If this course is set to continue, Le Roux is of the opinion that rating agencies such as Standard & Poor and Moody’s Investor Service will have no choice to once again downgrade South Africa’s credit rating to junk which would mean that South Africa would be seen as a riskier place to invest and as such, the government’s cost of borrowing on the bond market will increase. The solution: The South African budget deficit must be decreased drastically.

The game plan

According to Le Roux, the Finance Minister has three options to repair the structural damage to the South African Economy, namely: Curb government spending significantly, change the tax policy and lastly to put a stop to the use of tax payers’ money to capitalize state-owned enterprises. The latter includes financial lifelines to organisations such as Eskom and the Post Office.

“It is imperative that government spending should slow down significantly, and herein lies a strong message to politicians,” said Le Roux and explained that from a macro-economic perspective the country can no long rely on fiscal policy or help from the Central Bank.  In terms of tax increases, Le Roux does not see immediate relief for tax payers within the next three to four years.

It is Le Roux’s opinion that the focus should be on re-prioritisation and as such a clamp-down on spending is needed – especially with regards to capital expenditure. “The wage bill is completely out of control and it means that the government is not in the driving seat with regards to the economy. The route of fiscal prudence and fiscal discipline is the only way to ensure stability,” said Le Roux.

If fiscal prudence is followed, the following pay-offs will ensue:

  • Stability in the debt to GDP ratio.
  • The South African economy will move from a state of dis-saving to saving which means that the deficit status will turn to surplus funding. The latter will help fund capital expenditure.
  • A renewed sense of economical conservatism.

“The Minister needs all our support since economic reform will be to the benefit of all South Africans.”

  Mr Warren Makgowe, Prof Thanyani Mariba, Mr Ettienne Le Roux and Prof Linda du Plessis