[Source: Business Day Live by Peter Bruce.]
We South Africans have a morbid fetish with the worst possible news. Unemployment is sickeningly high. The government likes it because it is a banner to wave in support of its tireless efforts to reduce poverty. The unions like it because it is something to beat the government and business with.
Business likes it because it is a measure of how greedy the unions are and how useless the government is. The Economic Freedom Fighters (EFF) and Democratic Alliance like it because it’s a soapbox to stand on.
If there weren’t a poverty problem in SA, we’d have to invent something new. Oh wait, here’s one. We’re quietly losing control of our destiny, of our sovereignty.
I’ve been reading (very slowly) what Finance Minister Nhlanhla Nene said in his medium-term budget policy statement (MTBPS) last week. That’s where he takes a rolling three-year view of the economy. Three years is “the medium term” in case you didn’t know.
National budgets are pretty simple. What money is coming in and what’s going out? The gap between them is called a surplus if the income is higher than the spend and a deficit if it’s lower.
In the 2015-16 financial year, revenue (our taxes, mainly) will be R1.07-trillion. A trillion is a thousand billion. Spending will be R1.24-trillion. So the deficit will be R157.9bn, a billion being a thousand million.
Put another way, the deficit will be 3.8% of our gross domestic product (GDP), the money value of the goods and services we produce. By 2018-19, income will be R1.36-trillion and spending R1.55-trillion, and the resulting deficit of R158.2bn will be 3% expressed as a percentage of GDP.
Sadly, the people we borrow money from to finance the deficit, the foreign capitalist devils, don’t entirely agree. They think the deficit will be worse this year, at 3.9% of GDP, and that by 2018-19 it will have come down only to 3.5% of GDP. They look like small percentages, but in money terms they’re huge.
Under President Jacob Zuma’s administration, the national debt has grown so much it costs R128bn a year in interest payments alone. That is R350m every day, R500m a day if you exclude weekends. By 2018-19, by Nene’s (optimistic) estimate, interest repayments will have grown 36% to R174.6bn a year, the fastest-growing spend in the budget. Something will have to give, even if taxes are increased.
What happens to nations in too much debt is what happens to households. You lose your freedom, your sovereignty.
Forgive me for writing this down so deliberately. It helps me. Paying R174bn in interest a year in just three years’ time will cost more than R650m per working day. And that’s assuming interest rates won’t rise, which they will.
That’s one reason creditors doubt Nene’s numbers. Another, unusually for Nene, who is a good and cautious man, is that for the first time he is proposing, from next year, to begin issuing rand-denominated bonds into the markets towards the end of his MTBPS, what they call the “outer years”.
That’s never happened before, budgeting to end up worse than where you started from. He says that total national debt will increase by a massive R600bn in the next three years.
No wonder. He already guarantees R470bn for Eskom, Sanral, SAA and others, and you can’t turn that money to other purposes. The danger is that the markets will take the bonds, but at a much higher cost than he would like.
That’s because of what we have seen on our streets these past few days. The government has bowed to the demands of students, over whom the African National Congress (ANC) discovered to its horror it had no control, for no fee increases. And the EFF march Julius Malema led through the streets of Johannesburg on Tuesday was just breathtakingly big.
Sure, money can be scraped together for the students. And the EFF can be kept at bay politically. But the spectre of what has happened will, sure as hell, show up in the interest rates Nene is charged by doctors in Singapore and pension funds in California that lend him money by way of buying his bonds. They are not stupid.
They will have totted up what the government wants to do — build a national health system, make the largest single nuclear power plant order in history, provide free education, build a new steel plant, pressure productive farmers off their land, pay top dollar to a bloated public service and run the second-largest diplomatic service in the world.
Even assuming all those things are reasonable, at some stage the government will hit a ceiling it can’t get through. When that happens we will no longer control our destiny. The people we owe money to will, and the recklessness of ANC governance under Zuma will be laid bare. Will the Chinese bail us out? Not in a million years.
ABOUT that steel plant. The idea is for Chinese state-controlled steel maker Hebei to shut a plant in China, already awash with steel and desperate to cut its levels of pollution, and rebuild a new one here.
It will produce up to 5-million tonnes of steel a year, roughly as much as ArcelorMittal, formerly Iscor, so roughly doubling our capacity before other plants shut down as a result.
The Industrial Development Corporation (IDC) will be the local partner. It will cost about $5bn just to build. I don’t know the financing details, but it is an insane proposition whose only merit is it will bring some jobs to Mpumalanga. The state is right to take jobs to poor areas rather than expect the poor to migrate to existing jobs.
But Abel Malinga, the IDC’s head of mining and minerals, is not to be thwarted. “We are going ahead with it,” he says. “We are not going to change our minds.”
Famous last words. The steel from the new plant, when it opens in 2020, will be used in the local market and be sold at competitive prices. This echoes complaints that Mittal’s steel prices (not state incompetence) hold back the ANC’s infrastructure programme.
But infrastructure needs only the most basic steels — rebar to reinforce concrete and pipes and tubes for water. Everyone makes this stuff. We’re not talking the high-value special steels, coated sheets or alloys that the automotive and other high-end industries consume. The Chinese will keep that for themselves. And Egypt, Algeria, Senegal, Nigeria and Ethiopia have big steel plans too, so exports into the rest of the continent can’t be taken for granted.
Worse, the global glut of steel is now more than 600-million tonnes, piling up at plants or on the high seas as a floating spot market, ready to race to almost any bidder. That’s 126 years of the new Hebei plant’s maximum output.
The plant will lose money from day one. The Chinese will have priced that in as the cost of environmental cleansing. The jobs created for South Africans will be tenuous and the price of this industrial willy-waving will be painful.
57 700 000 (mid 2018 estimate)
5.2% y/y in November 2018 (CPI) & +6.8 y/y in November 2018 (PPI)
2.2% q/q (3rd quarter of 2018)
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