Public enterprises played a big part in South Africa’s credit ratings downgrade

With the broader implications of last week’s Cabinet reshuffle still being digested, capital markets have been quick to react. It took only a few days for S&P to formally report on its rating action in which it downgraded South Africa’s foreign currency government debt to sub-investment grade status.

S&P cited as its concerns changes in the country’s executive leadership. It believes this has put policy continuity at risk which in turn increases the likelihood that economic growth and fiscal outcomes could suffer.

Not to be lost in this chain of events is the significant role played by South Africa’s state owned enterprises.

S&P highlighted this in its note on the downgrade. Its main worry is that plans to improve the underlying financial positions of parastatals such as Eskom, South Africa’s massive power utility, may not be fully implemented. This is critical, as S&P has forecast government guarantees used to underwrite public enterprise liabilities reaching R500-billion by 2020. That’s roughly 10% of South Africa’s current GDP.

No doubt S&P had in mind the continued investment in expensive state-sponsored power generation programmes. These are contracted to Eskom for off-take, but must be underwritten by government guarantees to secure financing. Even more troubling is the fact that existing low-cost facilities are to be retired ahead of schedule. This is to make room for the new found excess in power generating capacity.

Regulations are being ignored
It’s important to keep in mind that the overhang of government guarantees by itself wouldn’t necessarily have led to a ratings downgrade. With the right governance structures and regulatory frameworks in place, state owned enterprises could be transformed from a liability to an asset. They could then support relatively high levels of debt for investments done on a prudent and value adding basis.

But there’s been little evidence of positive movement in this area. And it should come as no surprise that, at the moment, S&P sees state owned enterprises as risks — not enablers.

As a glaring example, take the National Energy Regulator South Africa decision on tariffs for Eskom. The North Gauteng High Court found that the regulator had deviated from its own set of regulatory rules in setting the tariffs. The regulator has since been granted leave to appeal that decision, arguing that the deviation had little practical effect. In effect it argued that the end justified the means.

While the argument put forward by the regulator may have some factual basis, the real issue is that it has shown little real concern over the general lack of procedural fairness and transparency applied to its decision making process. It will be interesting to see how the Supreme Court of Appeal views the matter on review.

The decision over airports tariffs is another disturbing example of poor regulatory processes. In December last year the Airports Company of South Africa, which regulates the sector, called for a 35.5% decrease in airport charges. Despite concerns previously raised by credit rating agencies over the lack of transparency in setting airports tariffs, the regulator is yet to publish the basis of its decision, or any of the underlying analysis that would have informed its tariff order.

Perception or reality?
S&P’s downgrade decision doesn’t represent a consensus view of the global rating agencies. Importantly, Moody’s has so far stopped short of issuing a downgrade. Instead, it’s opted to place South Africa on review to determine if recent events signal a fundamental weakening of the country’s institutional, economic and fiscal strength.

The newly appointed Minister of Finance Malusi Gigaba was quick to respond to these concerns. Importantly he’s recognised the value of putting forward the case for South Africa cogently and systematically.

He also highlighted the fact that the national treasury will be focused on reversing the triple challenges of poverty, unemployment and inequality.

Rating agencies would no doubt support these aims and recognise the fundamental importance of achieving them.

What’s been lost in stating the case for South Africa is a tangible plan for strengthening governance and regulation of its state-owned enterprises. With the public sector playing a huge role in the nation’s overall economy, well designed regulatory frameworks need to be articulated by government, implemented by its officials and embraced by those entities to which they apply. This isn’t overly difficult or costly – it only takes the policy appetite to do so.

Stephen Labson, Trans African Energy director and senior research fellow at the University of Johannesburg

This article was originally published on The Conversation. Read the original article.

The Conversation

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.


Coalition politics and law: The fight over Tshwane

With coalition politics on the rise, particularly in local government, this kind of court case is likely to become more common

High court declares Dudu Myeni delinquent

Disgraced former SAA chairperson Dudu Myeni has been declared a delinquent director by the...

SANDF inquiry clears soldiers of the death of Collins Khosa

The board of inquiry also found that it was Khosa and his brother-in-law Thabiso Muvhango who caused the altercation with the defence force members

No back to school for teachers just yet

Last week the basic education minister was adamant that teachers will return to school on May 25, but some provinces say not all Covid-19 measures are in place to prevent its spread

Press Releases

Road to recovery for the tourism sector: The South African perspective

The best-case scenario is that South Africa's tourism sector’s recovery will only begin in earnest towards the end of this year

What Africa can learn from Cuba in combating the Covid-19 pandemic

Africa should abandon the neoliberal path to be able to deal with Covid-19 and other health system challenges likely to emerge in future

Coexisting with Covid-19: Saving lives and the economy in India

A staggered exit from the lockdown accompanied by stepped-up testing to cover every district is necessary for India right now

Covid-19: Eased lockdown and rule of law Webinar

If you are arrested and fined in lockdown, you do get a criminal record if you pay the admission of guilt fine

Covid-19 and Frontline Workers

Who is caring for the healthcare workers? 'Working together is how we are going to get through this. It’s not just a marathon, it’s a relay'.

PPS webinar Part 2: Small business, big risk

The risks that businesses face and how they can be dealt with are something all business owners should be well acquainted with

Call for applications for the position of GCRO executive director

The Gauteng City-Region Observatory is seeking to appoint a high-calibre researcher and manager to be the executive director and to lead it

DriveRisk stays safe with high-tech thermal camera solution

Itec Evolve installed the screening device within a few days to help the driver behaviour company become compliant with health and safety regulations

The best local and international journalism

handpicked and in your inbox every weekday