What counts for SA in the wake of the Fitch upgrade

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JEREMY MAGGS: You’ll be aware that South Africa has secured its first Fitch Ratings upgrade since 2005. I think it’s an important signal that fiscal discipline, primary budget surpluses, better revenue collection, and debt stabilisation are starting to count.

But I think there’s also a harder question. It’s whether this is a genuine turning point or maybe just a simple, small reward for stopping the slide.

Joining me now is Jim Matsemela, who’s chief director for strategy and risk management at the National Treasury. Jim, a very warm welcome to you.

Let me get the broad assessment here. Is the upgrade a real economic turning point – or are we in danger, perhaps, of over-celebrating a move that still leaves us two notches below investment grade?

JIM MATSEMELA: I think to your question or to your point, this rating upgrade has been long in coming, and the celebration is a cause for celebration. I would venture to say that it’s not just a mere mention of a few things that the government said it has achieved.

It is actually a confirmation that government remains committed to sound public finances, in line with our government response.

This is evidenced by running primary budget surpluses for a period of three years in a row, and we continue to implement structural reforms that ensure that we support higher and inclusive economic growth which essentially underpin investor confidence.

JEREMY MAGGS: Jim, let me pick you up then on primary budget surpluses, if I can. The upgrade rests heavily on that, from what I understand.

Do you think those surpluses, though, can survive political pressure for higher wages, bail out social spending, particularly in a year where we have local government elections?

JIM MATSEMELA: They will definitely survive there, Jeremy. I don’t think at the end of the third year experiencing the surpluses, when we started with the plan, there was an expectation that perhaps we would perform as better as we did.

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But running this for a period of three years in a row without fail, I would say that, even going into a cycle, or an election cycle here, there is nothing that will derail our plans to achieve I think the primary surplus, as we plan to.

JEREMY MAGGS: Jim, on a macro level, Fitch praising prudent fiscal management – but I think it’s fair to say that ordinary South Africans still see weak growth.

They see high unemployment. They also see collapsing services in many respects. How do you explain the upgrade to someone who feels no improvement in their daily life?

JIM MATSEMELA: Well, a small digression, Jeremy – just allow me. I think in a worst case, or a worst-but-rare case scenario, such as when government defaults, we can agree that the taxpayers or the society at large tend to be the ultimate better of the cost of default, whatever the cost, whatever the nature of the default is.

And I think that when it comes to South Africa, it’s just unfortunate that it happens at a time when certain social issues happen to be on the radar. But I would even say that for an ordinary South African this should be beneficial.

As the DG [Director-General] said in one of the engagements, this rating upgrade should actually first of all lower or ease foreign costs for government, for businesses and for households alike.

So I think they also stand to benefit in some way as we all celebrate this momentous rating upgrade Jeremy, in my view.

JEREMY MAGGS: But it’s not going to be an immediate benefit, though, is it?

JIM MATSEMELA: The benefit tends to flow rather slowly, doesn’t it, as investment, as reforms take longer to show some results.

But I think we are on an upward trajectory, for which we can confidently say that the rating agencies have been watching over time.

It has been so many years, Jeremy, that they have been pressing us on these structural reform; and now they are seeing the turning point, and they are confirming that by saying  that they think in the foreseeable future we are on the right track,  and we can confidently upgrade you this time around – having not done so for so many years.

JEREMY MAGGS: Jim, Treasury says fiscal consolidation is gaining traction. But maybe explain to us what specifically has changed in the way that government is spending money, rather than simply benefitting from better revenue collection?

JIM MATSEMELA: I think if you look at the expenditure side, Jeremy – I am speaking for specialists who are very much in the Treasury and doing this on a daily basis – if you just look at the discipline that we have instituted, you look at the way the wage bill has been de-risked, which is a major expenditure item as far as we are concerned, I think we would safely say that when it comes to spending, especially with regard to the wage bill, that has been largely de-risked and it has been also flagged by the rating agencies.

And even our Treasury officials have advanced at that cost to say, ‘I don’t think when it comes to the wage bill, or at least the expenditure pressures emanating from the wage bill, there is so much of a risk there’.

And they can save themselves because unions and government have arranged or they’ve gone into a wage agreement that will make sure that we don’t increase wages beyond inflation.

Even if such a case were to happen, at least I think there has been some de-risking on that part.

JEREMY MAGGS: Isn’t the single biggest problem that you have to grapple with, though, while investors may like the direction that Fitch is giving us, I think that’s common cause for many municipalities of failing.

Infrastructure is under pressure. Service delivery for many South Africans is deteriorating. Jim, surely Treasury worries that local government can undo this national fiscal credibility that you’re talking about.

JIM MATSEMELA: Treasury is worried. But if you look at some of the responses that the minister has given recently, Jeremy, I think to the comfort of South Africans, certain measures that I think the government – the Treasury, along with other ministries – have instituted, there is cause for not being extremely worried.

Yes, I think we should admit that there are certain challenges and they continue to be visible.

But I think the measures that have been brought about recently should actually bring some comfort –  that I think there should be some discipline in financial or sustainability on financial issues pertaining to municipalities going forward.

JEREMY MAGGS: So in that respect, then – and this is a final question – as we look ahead, what’s the single thing you think that could derail the next upgrade? And what does Treasury need to do to convince Fitch?

JIM MATSEMELA: I think one thing that we need to spell out quite loudly, Jeremy, is the need to see a sustainable reduction or rather, stabilisation in the debt  path.

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So if we’re losing the levers on stabilisation, Jeremy, I can assure you that I think we may just as well go back to square one.

But pulling up on those levers, I think, will ensure that at least we maintain the current [status], if not actually seeing some upgrades in the near future.

So we are confident that on that basis we will achieve some upgrades in the near future if you keep to that.

JEREMY MAGGS: Jim Matsemela, thank you very much indeed. He’s the chief director for strategy and risk management at National Treasury. Thank you very much.