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, 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.
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, accusing the government of trying to force workers to bear the brunt of years of economic mismanagement and unchecked graft.
“The way the state has gone about notifying the workers is in extremely bad faith and dangerous,” said Matthew Parks, the federation’s parliamentary officer. “It causes anxiety among our members and collapses the space to engage.”
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 real issue from the budget seems to be the difficult times that lie ahead with very muted economic growth and a lot of cost-cutting, especially with the public-sector wage bill,” said Brendan Gace, head of private clients at Anchor Capital (Pty) Ltd. If spending on wages is curbed, there will be “an inevitable clash between government and the trade unions,” he said.
Moody’s Investors Service 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.