(Bloomberg) -- The credibility of South Africa’s proposals to curb debt and save its sole investment-grade credit rating will be put to the test by powerful labor unions outraged by plans to pare back the wage bill.
The government is seeking to backtrack on a three-year pay deal agreed with civil servants in 2018 and cut personnel spending by 37.8 billion rand ($2.5 billion) in the year through March 2021. The allocation for pay was also cut by 122.4 billion rand for the next two years to offset the effect of lower-than-expected economic growth and tax revenue, according to the budget review Finance Minister Tito Mboweni presented on Wednesday.
While financial markets cheered the news, with the rand gaining as much as 0.8% against the dollar on Wednesday, the government’s ability to hold firm against its 1.3 million state workers who’ve consistently won inflation-beating increases is in doubt. The Congress of South African Trade Unions, the country’s largest labor group, is a member of the ruling coalition and President Cyril Ramaphosa is indebted to it for helping him win control of the ruling party in late 2017.
“The budget is dependent on significant wage cuts,” said Investec Asset Management analysts Nazmeera Moola and Sisamkele Kobus. “There is absolutely no agreement with unions to achieve this, so at best this is a negotiating tactic.”
The budget lays bare the need for the government to curb expenditure.
The economy is set to expand an average of just 1.2% a year through 2022, and the budget deficit is projected to reach 6.8% of gross domestic product in the year through March 2021 -- the highest since before apartheid ended in 1994. The state wage bill has surged 40% more than inflation over the past 12 years, and accounts for more than a third of total government spending.
Failure to achieve the projected wage cuts would swell the fiscal deficit to as high as 7.5% in fiscal 2020-21, Lucie Villa, vice-president and senior credit officer at Moody’s Investors Service, said in a report on the budget.
“The authorities have yet to negotiate any moderation in wages with the country’s unions, which will likely be challenging given South Africa’s socioeconomic realities and would represent a significant departure from the outcome of previous negotiations,” Villa said. “Risks remain skewed toward a higher debt path given the challenges in containing spending growth and persistent risks to growth.”
The government isn’t planning to cut or reduce wages, according to Dondo Mogajane, the Treasury’s director-general. It’s proposing a 1.5% increase for the coming year and 4.5% in each of the next two years, he said, adding union concerns will be taken into account.
“We are opening up and saying ‘there are no holy cows here, let’s talk,’” Mogajane said in an interview. “The budget deficit is not going to be 6.8%, it’s going to be around 7% or right up to 8% if we factor out the wage proposal. We are prepared to open the conversation with labor to ask what else to cut.”
Mboweni conceded that difficult discussions with the unions lay ahead, but expressed confidence that “we will be able to find each other.”
Cosatu was less conciliatory, with its top leadership accusing the government of trying to force workers to bear the brunt of years of economic mismanagement and unchecked graft. Any changes to the existing wage deal would have to be agreed by all those who signed it, while the budget couldn’t dictate the terms of future accords, it said.
“There is an attack on collective bargaining,” Bheki Ntshalintshali, Cosatu’s general secretary, told reporters in Johannesburg on Thursday after a three-day meeting of the federation’s central executive committee. “The government can’t take a decision and then say let’s negotiate. You don’t announce and prejudge what is going to happen in those negotiations.”
Civil servants last staged a strike in 2010 that dragged on for three weeks before they were awarded an inflation-beating 7.5% raise. The current wage dispute will be addressed within the wage bargaining council, Ntshalintshali said.
Moody’s is the only major ratings company that still assesses South Africa’s debt at investment grade and is scheduled to make an announcement on the rating next month.
The budget highlights the severe deterioration underway in public finances and the long-term policy challenge of stabilizing government debt, Fitch Ratings, which has the country on one level below investment grade with a negative outlook, said on Wednesday.
“These consolidation measures rely heavily on hoped-for moderation in public-sector wages, which might not materialize, adding further risks to South Africa’s deficit and debt trajectories,” Fitch said in a statement in its website.
What Bloomberg’s Economist Says
“There’s increasing evidence that the 160 billion rand cut to the wage bill Mboweni proposes will be very difficult to implement, especially in the current economic climate. Sticking with future wage cuts as a deficit reduction policy is therefore not credible. What is more credible are union threats to bring the country to a halt if this happens.”
--Boingotlo Gasealahwe, Africa economist
-Click here to view the research
(Updates with Moody’s comment from seventh paragraph.)
--With assistance from Zoe Schneeweiss and Nkululeko Ncana.
To contact the reporters on this story: Paul Vecchiatto in Cape Town at firstname.lastname@example.org;Amogelang Mbatha in Johannesburg at email@example.com;Prinesha Naidoo in Johannesburg at firstname.lastname@example.org
To contact the editors responsible for this story: Paul Richardson at email@example.com, Mike Cohen, Gordon Bell
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