- It's budget time for our beautiful little nation on the tip of Africa.
- As always the Government needs cash because we have been spending far more money than enters our bank account.
- In short, we have been funding our credit card by borrowing more and more, as multiple billions of Rands have been spent by delinquent SOE’S (amongst others) with little regard for where the money will come from.
- Remember when SARS collected far more than they projected when commodity prices exploded? Those were good times.
- It was a real opportunity to pay down debt. But like most lottery winners, we spent the money and promised the recipients that we would keep giving them cash, as if the lottery would keep paying, even when we didn’t choose the winning numbers.
- Social grants (and bailouts) quickly become entrenched into the system, and withdrawing them when the money dries up creates social angst, ESPECIALLY in an election year.
- And here we are. No longer generating excess taxes on booming exports.
- Even if prices had remained elevated we simply can’t get the stuff out of the ground efficiently (load shedding), and we can’t get what we do extract to market because the transport network has fallen apart.
- All of which makes this year’s budget a real head scratcher for our Finance Minister.
- For years we have been promising investors that our steepening debt to GDP ratios will soon flatten and improve, only to push those projections into the future.
- Government now consistently overspends and undercollects, and this has resulted in multiple credit downgrades over the years, meaning that the funding costs for that deficit continue to increase year after year.
- A virtual cycle of despair!!! Increased deficits mean increased borrowing and increased funding costs, which feeds through into yet bigger deficits.
- So when it comes to presenting a budget in an election year, it becomes a really tough balancing act.
- One thing you do NOT want to do is annoy the electorate by cutting grants to the very people who depend on you for their livelihood.
- You can hike taxes – but that is growth negative. You can hike VAT, but that affects the very same people receiving State assistance the most. You can introduce a wealth tax, but that will simply drive even more capital offshore and increase tax avoidance.
- Rock, let me introduce you to a hard place!!!!
- There is however one account that ironically has “generated” a surplus even as everything else has deteriorated.
- This account goes by the acronym GFECRA – in short, it is the profit made by the Reserve Bank from holding gold and foreign exchange reserves.
- A very short explanation follows.
- In a period spanning the late 1990s to the early 2000’s, the Reserve Bank successfully turned South Africa’s foreign exchange reserves from a deficit of roughly 20 billion USD (accumulated during the last years of Apartheid) to a very healthy surplus of more than 50 billion USD.
- These dollars were bought when the Rand was trading at around 7 or 8 to the USD.
- These dollars can now be sold (or accounted for, known as mark to market) at around 19 to the USD, effectively giving the Reserve Bank an accounting windfall of 500+ billion rand.
- And this looks like a very tasty pie for Government to get its hands on.
- A 500 billion rand cash injection (or a part thereof ) will certainly take the immediate pressure off the need to balance the books. It solves an enormous amount of immediate pressure.
- I see some pundits are suggesting that the Reserve Bank actually sells some (or all) of these dollars in order to monetize the cash.
- Let me be very clear. That is a very stupid suggestion. A country like ours that generates Current account deficits year after year, requires healthy Foreign Currency reserves to avoid a foreign debt crisis from materializing.
- And even selling just a small portion sets a precedent and opens the door for future machinations…it is NOT a good idea.
- You can however do an accounting entry between Government and the Reserve Bank whereby Government is able to access this cash (profit on reserves).
- Without getting too technical about balance sheet adjustments, what this then does in simple terms, is create a loan between the Central Bank and the Government which of course also needs to be financed.
- So yes, The fiscus can quickly get a cash injection, however, if this cash is not utilized in revenue generating projects, it simply means that the Governments deficits are negatively impacted in years to come.
- It can also create a problem for the Central Bank.
- Should the Rand for some or other reason strengthen from these levels in future years, the Reserve Bank will show a loss on its accounts, which of course need to be financed from somewhere.
- Regular visitors to Casinos will tell you that as their losses accumulate, so the loan sharks start to circle. What seems like a short term solution to a growing problem, very quickly escalates as pay back date approaches.
- There is no such thing as a free lunch in economics.
- There is only one way for Government to get its finances in order.
- Growth and resultant investment!!!!!
- And we know that we cannot achieve such with the current policy mix coupled with Eskom’s inability to generate the required energy.
- In the meantime there is the small matter of an election that needs to be won. Giving rise to all sorts of promises that need to be delivered.
- Using the GFECRA surpluses is dangerous and irresponsible – but perhaps slightly better than the alternatives.
