The government will collapse under its debts if there is not a dramatic change of course.
This column was first published in Business Day.
I wish I knew more history. I’ve studied it formally once after school, when I took a course in precolonial African economic history at the London School of Economics. It exposed the preconceptions an apartheid-era childhood had left me with. I felt as if I had been released from Plato’s cave.
Right now, I wish I knew much more about two other historical topics: epidemics and state financial collapses. Both would clarify the issues South Africans today must grapple with.
Last week I was struck by newspaper clippings from the 1918 Spanish Flu epidemic in the US debating the use of face masks. City health authorities mandated them, then rolled back, then re-mandated them. Citizens argued about the effectiveness, discomfort, and plain selfishness of being a “mask slacker” (a 1918 term that fits rather well today).
There is now no doubt that masks reduce the spread of the disease, but free rider problems mean we’d probably be better off if everyone falsely believed it was about protecting themselves. And officials still prevaricate about mandating their use.
But after last week’s emergency budget by Tito Mboweni, it was financial collapses I wish I knew more about. The finance minister made one thing abundantly clear: the government will collapse under its debts if there is not a dramatic change of course. If that happens, we will lose our sovereignty to our lenders.
There is as much myopic denial about this as there is about using face masks. The interventions are uncomfortable, but they avert disaster.
History gives us plenty of financial crises to look at: Venezuela, Greece, Argentina stand out in the past decade. There is always much in the detail that distinguishes them, but some common themes.
The causes usually involve both external (the 1998 emerging-markets crisis for Argentina, the 2008 global financial crisis for Greece) and internal factors. The internal factors always include budget deficits, years of government expenditure growth running ahead of revenue growth, and, as the financial system collapses, interference in financial markets that backfires as confidence collapses.
But it is the politics around these that are most fascinating. As a financial system implodes, with banking crises leading to freezes on deposits and collapsed currencies, the initial response is panic as social unrest and mass protests ensue.
This often fans populist politics. But, as the realisation evolves that the way out of the mess is to access international funding support, including the conditions it comes with, a sort of technocratic reform process is grudgingly accepted. There is always economic pain taken by ordinary people.
Of course, that sample includes those who failed to avoid crises. We could perhaps learn more from countries that changed course before collapse became inevitable. That is the group we must now hope to be part of.
There are several factors we have in our favour. For one thing, thanks to careful fiscal management after 1994, we do not have a large amount of US dollar-denominated debt. Our debt levels may be at crisis levels, but they are largely rand denominated. Many countries that collapsed did so because currency crises became debt crises because liabilities were in dollars but revenues were in rapidly depreciating local currency.
However, as we are forced to unusual sources of funding in the Covid-19 crisis, there is some risk SA will slacken this discipline. It is important to hedge the currency risks that come from borrowing in dollars as we are doing from several international sources.
We still have a remarkably transparent budget process with far greater oversight than other countries that have collapsed. Our problem is the lack of accountability on spending. The dismally few government institutions that manage to obtain clean audits each year is the clearest indicator of how bad financial management has become at the delivery level.
We still have a strong and resilient financial sector. Banks are well capitalised, with regulators having taken on board the lessons of 2008 and improved oversight and risk management. We have good insurance and savings industries that can maintain client confidence even as the government’s finances waver.
We also have good financial market infrastructure, so global investors can be confident their investments are safe from contagion of national problems. These are important differences from others where crisis has taken hold.
Mboweni says the cabinet has approved a balanced budget for the 2023/2024 fiscal year. That is a dramatic objective that the cabinet will balk at when the implications become clear. It won’t be politically feasible to force through the level of austerity required to meet that target.
Politically, the biggest risk is the increasing isolation of the Treasury from the rest of the government, with declining respect across the government for the central role the Treasury constitutionally must play in protecting national finances.
If the cabinet is merely smiling and nodding in response to Mboweni, with no understanding or intention of delivering the fundamental changes needed, then we really will have a problem. And we will indeed then be writing a history for others to learn from.