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Supplementary budget shocks, says Johan Willemse

Screen Shot 2020-06-30 at 2.26.59 PM

Prof Johan Willemse, agricultural economist, SAPPO News June 2020, photo credit: Due

We knew that the Government’s finances are in trouble and we explained the situation in this column after the February budget. However, the supplementary budget delivered by the minister of finance on 24 June 2020, was a real shocker. The reality is that Government is spending R145 billion extra on the Covid-19 issue, but the real issue is a record budget shortfall due to the economic meltdown in the making, with the wrong policy choices and corruption on the cards.

The minister said that the economy will shrink by 7,2% during 2020. The IMF is currently estimating a decline of more than 8% for South Africa. This is the largest economic contraction in more than 90 years. However, other economic models suggest a much larger decline of up to 16% in the economy. This will be a massive shock on consumer spending as unemployment also increased to above 30% in the first quarter of 2020. Market analysts expect unemployment could reach close to 40% before it stabilises.

According to minister Mboweni, the world economy is also in a very bad position and will shrink by more than 5% this year resulting in the largest per capita income drop in more than 100 years! The problem is that we cannot export and easily earn extra income in the international market as the world gets poorer and populations’ and businesses’ behaviour change.

This will result in a strong decline in disposable income and we will be very naïve to think that this will not impact on the South African and world food market and change consumer food behaviour. It is already reported that white maize meal usage in South Africa has grown very strongly during the first part of 2020, replacing other food products, as poorer consumers scale down.

The question is, given this new, scary economic outlook, how will spending on meat change, as many consumers get even poorer in South Africa and the rest of the world? How will our business environment change?

The reality is higher Government spending of just above R2 trillion, compared to a meagre expected income (tax) of R1,12 trillion for the 2020/21 tax year. Spending increased to a record level, while income (tax) dropped significantly as a result of the economic meltdown in process.

This will leave a record shortfall of R761,7 billion that will be funded by Government bond issuing and the borrowing of money internationally of $7 billion! There was not detail given on the source of this funding, but experts suggest a large part will be from the IMF. This will take government debt to just below 81,8% of GDP from an anticipated 65,6% in the February 2020 budget this year. The so-called debt trap is looming.

The minister acknowledged that the shortfall is so large, that it cannot be financed out of the domestic savings pool. The alternative would be for the Reserve Bank to print money (like Zimbabwe and other countries) and destroy the value of the currency. This will result in run-away inflation.

Do not be mistaken; this is a very serious situation that was looming the past few years. If this were a business, you would never get extra debt unless you have a very serious business plan to implement to turn the business around, which Government do not really have.

There was very little on policy reform although promises of a very large infrastructure investment programme were made. The medium term budget framework in October 2020 will be done on a zero-based approach, to restructure and reduce Government spending for the years to come. There was no mention of extra money for all the SOE’s that is basically bankrupt, except the Landbank that got R3 bn to keep going.

We can keep on debating the negative issues, but the challenge is: how do we change the debate among ourselves to try and understand how the economy and food markets will change and how can we adapt to the new reality?

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