How should one view the risks identified in the Medium Term Budget Policy Statement of 11 November 2021?

This is the third brief in a series of three on the 2021 Medium Term Budget Policy Statement. It considers the baseline projections of the MTBPS. In an uncertain environment, the credibility of the MTBPS depends on its assessment of risks. The second brief dealt with risks arising from the global economy, institutional failure and social and political conditions. This brief considers the impact of risk on the functioning of the economy.


What risks have the Medium Term Budget Policy Statement of 11 November 2021 (“MTBPS”) taken into account in its economic and fiscal forecasts, and what are the implications of these risks? 

In its own words,

“Significant risks to the economic and fiscal outlook include the following:

  • Uncertainty in the global outlook, particularly the risk of higher inflation and tighter monetary policy. South Africa’s cost of borrowing remains elevated. Debt-service costs will consume an average of 20.9 per cent of main budget revenue per year over the medium term and market conditions for issuing further debt are unfavourable. Slower global growth, or a reversal of the commodity cycle, would negatively affect revenue collection.
  • The evolution of the COVID-19 pandemic and slow progress in the rollout of vaccines, which poses risks to economic recovery.
  • Delayed implementation of structural reforms. The slow pace of reform continues to sap business confidence, private investment, productivity and competitiveness. Electricity supply constraints, which could worsen over the short term, are a drag on growth. In contrast, progress on energy reforms poses upside risks to fixed investment and the overall economic outlook.
  • Sharp declines in revenue alongside high demand for support over the past year from provinces and municipalities, many of which were experiencing governance, financial and operational problems before COVID-19. Many require greater capacity to deliver services.
  • The poor financial condition and operational performance of several large state-owned companies. The fiscal framework provides no support to state-owned companies over the medium term, but these entities remain a large contingent liability risk.”[1]

From this risk summary, it is clear that much depends on whether the South African Government is willing and able to deal with several of the specific issues that have been identified. Another way of putting it is that National Treasury is in effect asking whether Government is up to the job. 

Business confidence

In addressing the effect of the slow pace of reform on the state of business confidence, one is also left with the question whether Government actually understands what motivates investment or alternatively, discourages it. Whatever it may say in its public statements, Government has shown through its conduct that it often does not understand the motivating forces behind investment decisions. The fact is that investors are not deterred by risk, provided that it is properly understood and quantified, that it is not subject to unpredictable changes in Government policy, and finally, that the returns justify taking the risk. South African investment confidence has taken a hammering over more than a decade: the MTBPS states that investment amounted to about 14 per cent of GDP (compared with the National Development Plan target of 30 per cent), following a 13-year decline since 2008.[2] 

Government’s incapacity to manage complicated undertakings

In addition, the evidence clearly shows that Government does not possess the capacity to launch and run major undertakings which require precise planning and careful implementation. There are many examples in this respect. 

First is the project concerning the National Health Insurance (“NHI”). The MTBPS states that it had previously been projected that the NHI would require about R40 billion per year in additional funding in the first five years, and perhaps considerably more over time. However, it continues:

“At present, however, there is insufficient capacity in the health sector to work substantively on national health insurance. The national health insurance indirect grant has been underspent, the National Health Insurance Fund has not yet been established and the National Health Insurance Bill still needs to be passed by Parliament. It is therefore unlikely that national health insurance will be a significant cost pressure in the medium term.”[3]

From their respective public statements, one may indeed wonder whether the Department of Health and National Treasury have the same facts in front of them. 

Second is the regulatory mess regarding the small business sector, which is a major employer in the private sector. 

“Mounting calls over the years by the business community, the ratings agencies, the IMF, World Bank and many others to reduce the barriers to South Africa’s economic growth as an imperative of government, including those resulting from multiple and conflicting regulations, have gone unheeded or at best, been paid lip-service. South Africa’s businesses – large and small – have seen substantial periods of policy uncertainty in recent years, some of which have come from single departments, and some in pieces of legislation that have come from different departments with contradictory provisions and little coordination. Business has also had increasing regulatory interventions in the business space, frequently without consultation - even prior to Covid-19 lockdown measures - and often with little consideration to their practicality, cost, administrative burden (both on business and government) and unintended consequences.”[4]

Or as the Minister of Finance puts in in his foreword to the MTBPS:

“Businesses remain constrained by longstanding obstacles like electricity shortages, inefficient and high-cost rail freight, inadequate broadband spectrum and red tape.”[5]

Third is the whole Eskom issue. Government has to accept its responsibility in the situation that confronts Eskom (through its supposed custodianship of a state-owned enterprise): as a result of a lack of adequate maintenance over many years, coupled with badly functioning new generating capacity (Medupi and Kusile), Eskom is in an extremely serious situation. The most recent load-shedding has shown that Eskom’s (unplanned) breakdowns and planned maintenance together account for over half of its available generating capacity. Since a secure and dependable electricity supply is crucial not only for individual businesses but for the economy as a whole, this state of affairs also has an obvious damaging effect on investment decisions in general. 

Fourth is the Minerals Charter, a large part of which the Courts have recently set aside. Having created the perception that BEE ownership requirements and procurement regulations are subject to regular unilateral amendment by Government, accompanied by a massive backlog in the issuing of mining and prospecting rights, it is not surprising that in 2019, South Africa accounted for only 1% of global exploration and 0.1% of greenfields exploration.[6] The Department of Mineral and Energy Affairs does not seem to understand that a predictable and stable regulatory environment and an efficient licensing system are absolute pre-requisites to attract South African and international capital for exploration and mining projects. 

The danger of these risks

In its MTBPS, there is an obvious awareness by National Treasury of the elements in Government’s behaviour which negatively affect the investment climate. Investor confidence is fundamental to a growing economy, in making funding available for new businesses and to expand existing ones, which in due course will boost economic activity, employment and ultimately, Government revenue. However, individual parts of the Government apparatus continue to appear oblivious as to how this sequence functions and what is required to start it up. 

Government also overestimates its capability in implementing major projects and should have learnt by now that the way to proceed is to promote the role of outside expertise and management in such projects, whilst keeping a strictly supervisory role for itself. 

These two aspects of Government’s conduct, first concerning business confidence and second an inability to run major undertakings, have resulted in a precarious situation which presents a major risk to any fiscal policy (however sensible it may be) and by extension, to the economic situation in the country.

Anton van Dalsen
Legal Counsellor

[1] MTBPS, page5.

[2] MTBPS, page 16.

[3] MTBPS, page 55.

[4]Tackling the “Disabling Environment” to boost Economic Growth, Small Business and Jobs, the Small Business Institute, March 2021, page 12.

[5] MTBPS, page iii.

[6] Presentation to the Junior Indaba by the Minerals Council, June 2021.