South Africans received another sombre reminder of the appalling state of government-owned institutions last month when National Treasury announced that Eskom needs financial support to the value of R59 billion over the next two fiscal years (R26bn in 2019/20 and R33bn in 2020/21) to ensure that the power utility remains a going concern, writes Jana van Deventer, head of financial markets at ETM Analytics. Jana is a regular guest writer for Sakeliga.
AUTHOR: JANA VAN DEVENTER, ETM ANALYTICS
Parastatals crippling the economy
South Africans received another sombre reminder of the appalling state of government-owned institutions last month when National Treasury announced that Eskom needs financial support to the value of R59 billion over the next two fiscal years (R26bn in 2019/20 and R33bn in 2020/21) to ensure that the power utility remains a going concern.
The significant cash injection that Eskom requires comes at a time when the parastatal is grappling with some R440bn worth of debt, while the latest financial results showed that the company incurred losses to the value of R20.7bn in the financial year through March 2019.
Even more concerning is the fact that there are no specific conditions tied to the latest bailout and at writing, South Africans remain in the dark about the strategies that will be implemented to ensure the future sustainability of Eskom.
National Treasury is funnelling more money (which South Africa does not have) into the endless pit that is Eskom, with zero signs that fundamental changes will be implemented in underlying structures.
There has been no tangible progress towards unbundling the enormous state-owned enterprise (SOE) into three separate entities (generation, transmission and distribution), and the Minister of Public Enterprises, Pravin Gordhan, in August indicated that the new restructuring office’s primary responsibility would be to restructure the company’s debt (rather than the entity itself).
The office will also assist with the formulation of a white paper – scheduled to be released in mid-September – which is expected to outline the steps needed to restructure Eskom. In the interim, Eskom remains the single most significant risk to South Africa’s already constrained fiscus.
The cost of policy mismanagement
One of the main ways in which we measure Jacob Zuma’s performance as President is through the gradual yet substantial slide in fiscal dynamics that occurred during his tenure. As the country is on the verge of receiving a full-blown junk status credit rating, it is almost impossible to consider that the country had a credit rating that was several notches above investment grade less than a decade ago.
The slide in the credit rating has coincided with a gradual build-up in debt, a trend that remains ongoing. In the 2019/20 fiscal year, South Africa’s debt-to-GDP ratio will be very close to 60%, which marks a substantial increase from levels around 26.5% of GDP back in 2008.
The counter-cyclical fiscal stimulus that was initially introduced to help cushion the fallout of the Global Financial Crisis remained in place well beyond the post-crisis period. Subsequently, South Africa turned into a country that spends way beyond its means, resulting in a significant and substantial build-up in debt. For context, nominal expenditures are growing at levels close to 8.0% a year, while the economy is hardly expanding at 1.0% annually. Therefore, regardless of the many tax increases implemented in recent years, the national government budget has continually deteriorated, and the fiscal deficit is expected to come in above 6.0% of GDP this year. State capture, of course, has compounded the extent to which budget degradation has materialised given that a substantial proportion of budget funding has been lost to corruption and grave maladministration.
Where to next?
The gradual debt build-up has resulted in South Africa being on the receiving end of numerous credit rating downgrades in recent years, with two of the three major credit organisations rating our debt at sub-investment grade. Only Moody’s still has SA’s rating at investment grade, yet we are on the precipice of a full-blown junk rating as we are only a single notch above sub-investment grade.
Following the latest announcements of another hefty bailout for Eskom, all three credit rating agencies issued warnings about the country’s deteriorating credit dynamics. Fitch lowered the outlook of the county’s BB+ debt rating from stable to negative on July 26th.
Moody’s, meanwhile, affirmed that the proposal to more than double the financial support allocated to Eskom was credit negative for the sovereign, while S&P stated that Eskom continues to pose significant risks and that further bailouts will stress SA’s debt metrics. The overarching narrative emphasises how risks for South Africa to receive further downgrades lurk, and these will materialise unless reforms are pushed through.
The accompanying chart – which plots an aggregate credit rating score (inverted) vs the debt-to-GDP ratio – highlights how the slide in our debt rating has materialised alongside the gradual rise in debt.
It also hints that unless the government and National Treasury engineer a solution which guarantees fiscal consolidation through debt stabilisation, further downgrades deeper into sub-investment grade territory cannot be ruled out.
Time is running out for South Africa, and some difficult decisions are going to have to be made to avoid further fiscal slippage. Options are limited, however, as the government has likely reached a limit in terms of how much more taxes it can extract from the private sector.
Meanwhile, further debt issuance risks sending South Africa over the fiscal cliff.
President Ramaphosa has indicated on several occasions that partial privatisation of SOEs was not on the agenda, yet Finance Minister Tito Mboweni himself indicated earlier this year that partial privitisation should be an option to salvage the country’s financially beleaguered parastatals.
Therefore, while political meddling has thus far prevented the implementation of difficult decisions, South Africa is arguably reaching a point where these decision-making processes need to be depoliticised. The alternative to taking these tough decisions would be to the detriment of the country as a whole.