South Africa’s R165-billion infrastructural programme, much of which will have to be funded offshore, is unlikely to cause a capital constraint crunch.
The total borrowing requirement is likely to be about half of the R165-billion figure and the offshore requirement could be half as much — R40-billion. But analysts say that the country’s credit rating stands it in good stead, enabling it to fund its huge infrastructural developments.
Shortage of capital, the analysts say, is unlikely to be a growth constraint as the country kicks into a higher growth gear, but they warn that skills shortages may be the real crunch the country faces.
South Africa has a better sovereign rating than many of its emerging market peers and the country’s parastatals, especially Eskom, are in much better shape. Over the past month, Eskom, Transnet and the Industrial Development Corporation have presented a picture of good health with solid financial results.
According to The Handbook of Country Risk 2005, compiled by French-based credit management company Coface, South Africa has a rating of A3 — two rungs from the highest possible rating — accom-panied by a short-term assessment of being ”quite low risk”.
Of the so-called Bric economies — Brazil, Russia, India and China — China is rated A3 and ”low risk”, while Brazil and Russia have a B rating and are seen as ”moderately high risk”. Eskom’s ranking by Moody’s was recently upgraded to A1 for unsecured domestic currency borrowing.
Stanley Subramoney, deputy CEO at PricewaterhouseCoopers, confirmed that South African companies’ ability to borrow in foreign markets is ”very good” and the local energy sector presents growth opportunities.
This year’s edition of Price-waterhouseCoopers’s Utilities Global Survey describes utilities as being ”under pressure” owing to supply security concerns and investor concern about regulatory uncertainty and price volatility.
The survey also notes that financing required for investments would be particularly tough for countries outside the Organisation for Economic Cooperation and Development, such as South Africa, because of a small capital base and operational risks. But it adds, ”In theory, [South African] utility companies should be well positioned to compete for investments they require.” This is because power must be consumed and, in many poor countries, the prospect of alternatives is distant.
This week a range of commentators suggested that South Africa’s robust macroeconomic picture has given it an edge in the bid to access capital for infrastructure investment, but they warned the country may need to tread more carefully in its bid to attract the necessary skills.
Iraj Abedian, founder and CEO of Pan African Advisory Services, who also sits on the Transnet board, pointed to South Africa’s capital inflows as a reason there is unlikely to be pressure on interest rates. Working on the assumption that half the total will be borrowed, he estimates a borrowing requirement of R80- to R100-billion over the next five to seven years, or R20-billion a year.
Last year R150-billion flowed into the country’s capital market. There was also R40-billion of corporate bond inflows, most of which were oversubscribed, suggesting room for further borrowing. Capital inflows should therefore easily cover local borrowing requirements.
”At a macroeconomic level, there should be no pressure on interest
rates,” says Abedian.
He cautioned that what may add pressure to interest rates is how the projects are implemented. If investors see snags and delays and are concerned about how projects are managed, they may charge a premium and in turn put pressure on rates. He said the key to timeous acquiring of the required skills lies with current immigration laws.
Lino de Ponte, an immigration law analyst at Deloitte, describes the new Immigration Act as being between ”good and fair” and certainly better than the United States’s and South America’s immigration laws. He says that apart from teething problems, the law should allow skilled engineers and project managers to come in.
One of the potential problems is the proposal to change the quota permit system from general to specific. The system currently allows 500 000 professionals to be brought in a year.
The government would like to specify these by professional category. De Ponte notes that the problem with being specific is that it is reactive and has a time lag. By the time the new quotas are published, the market has different needs.
Eskom and Transet will be major spenders on infrastructure renewal over the next five years. The electricity utility has announced it will spend R84-billion on electricity infrastructure. A further R9-billion will be drawn from independent power producers.
After turning a R6,3-billion loss into a R6,8-billion profit, Transnet announced it will drive a five-year, R40-billion investment programme.
Both entities plan to finance half their investment requirements from their cash flow; the other half will be borrowed from local and inter-national markets.
Abedian said that the biggest challenge is the current global cycle of infrastructure renewal. Countries such as Brazil, Russia, India and China — the so-called BRIC countries — are embarking on infrastructure renewal of their own. Old Mutual, for example, is part of a consortium to build an airport in Mumbai, India.
This means that, for example, when Eskom orders a cooler tower the order will probably be competing with a more lucrative order from China. This is where South Africa’s ability to attract capital may prove an asset.