“He was handed what is a difficult portfolio currently" —Thabi Leoka referring to the finance minister
NEWS ANALYSIS
The pressure is building on Malusi Gigaba, who has been deposited in the finance ministry at a time when the smartest possible decisions have to be made if the South African economy has any hope of weathering the financial and political storm it is in.
Confidence in Gigaba’s ability to steer the country’s economy in the right direction is not as strong as it was in former finance minister Pravin Gordhan, who had a gift for calming the markets.
But Gigaba is tasked with making even more difficult decisions than his predecessor was, because poorly managed parastatals appear to be reaching breaking point, revenue collection continues to dwindle and debt repayment costs are up.
Now, Gigaba will consider selling some or all of the state’s stake in Telkom to inject yet more cash into the ailing SAA, which, unable to get its finances in order for years, has proved a significant liability to the fiscus.
On Wednesday, Telkom issued a cautionary statement to investors warning of the government’s intention to reduce its 39% stake in the company.
Eskom could be the next to make demands on the fiscus, with Gigaba conceding that there had been a discussion about “soft support” for the utility, the details of which are yet to be fleshed out. But public finances certainly seem incapable of plugging the hole. The treasury’s statement of revenue and expenditure, released this week, shows that revenues are falling short of expenditure.
Revenues as at July 31 were recorded at 26.9% of the budget estimate for the year to date — lower than the 28.7% recorded at the same time last year.
Meanwhile, expenditure is roughly at the same point it was last year — at 32.9% of the budget estimate. This, the treasury noted, includes a R2.2‑billion payment towards SAA to prevent the airline from defaulting on its debt obligations.
Worryingly, the debt service costs are also racking up more quickly than last year. According to the treasury’s cashflow statement on July 31, debt service costs amounted to R44‑billion in the year to date — 27% of the budget estimate for the year. Last July, debt service costs were only at 15% of the total budget for the year.
Experts expect the budget deficit will be much wider than anticipated.
Gigaba is also eyeing government employee pensions to assist where state coffers cannot.
He told Parliament that the treasury could consider asking the Public Investment Corporation (PIC), which manages the Government Employees Pension Fund, to come on as an equity partner to fund some R13‑billion of SAA’s bailout.
The PIC manages about R1.9‑trillion in assets and already holds a substantial portion of state-owned enterprise debt — R190‑billion compared with the total parastatal debt market of R243‑billion, according to Fin24.
This week, Gigaba reportedly told trade union federation Cosatu’s central executive committee that he cannot guarantee that the government won’t use PIC funds to capitalise its own companies and projects.
Opposition parties have decried it as terrifying that the treasury would consider using government employee pensions to prop up SAA.
The rand has been volatile, as always, this financial year — reaching a high of R13.90 to the dollar after Gordhan was yet again unceremoniously removed from his post. But South Africa benefits from the fact that, unlike its peers, much debt is issued locally and so it is denominated in rands.
South Africa’s 10-year bond yield — a benchmark indicator of what interest rate a country pays to borrow from the market — spiked at over 9% earlier in the year and was trading at 8.6% this week. This financial year is the first time the yield has consistently traded over 8.5% since 2009.
This is probably a direct result of South Africa’s credit rating downgrades that followed Gordhan’s removal from — and Gigaba’s elevation to — the treasury, said Thabi Leoka, economic strategist at Argon Asset Management.
Even so, all things considered, a bond yield of 8.6% is not a crisis, Leoka said. “It means investors are not pulling money out despite the political noise or a flailing or weak economy. If [there was] a yield of 9%, as was the case with Nenegate [when then-finance minister Nhlanhla Nene was unceremoniously removed from his post in 2015] or as we saw during the credit downgrades, that would be a sign that investors are jittery,” she said.
Gigaba faces a tough balancing act in the lead-up to the mini-budget — his first budget in charge — in October. “He is finance minister of an economy that’s in a recession. Last year we weren’t in this position and the fiscus is not in as healthy a position. So he will be delivering [the mini-budget] under difficult circumstances,” Leoka said.
Gigaba will also face more pressure from ratings agencies, which will be back in the country in November and will watching the figures closely, she said.
Leoka said it could not be claimed that Gigaba was doing anything that Gordhan would not have done.
“He is continuing with what the previous minister did, but with the reshuffle and current environment, it is more difficult than when Pravin was finance minister,” she said.
“He was handed what is a difficult portfolio currently. We can only judge him by what happens in the medium-term budget policy statement, and in December when ANC policy has been endorsed and how he implements that policy, if it does change, in 2018 and beyond.”
Ralph Mathekga, political economist and author of When Zuma Goes, said although it would only be fair to give Gigaba time to prove himself, South Africans could not afford to be fair at this juncture.
“He used to be at public enterprises, he didn’t do a good job, and now he is at national treasury,” said Mathekga. “If you look at his daily activities and the issues he is confronted with now, there is added responsibility. It is much bigger than that which he didn’t do well at in his previous post.”
Putting aside all doubts that Gigaba was his own man and not put in the post simply to do the Gupta family’s bidding, Mathekga said a substantive question remains: Is he up to the job?
“I have my doubts. Some of his decisions would have been the ones Pravin would have made, but there is the question of legitimacy and how we view his intervention,” he said.
Gigaba needs to find practical solutions to pressing problems, he said, such as how deal with poorly managed state-owned companies.
“So how do you close the gap? Especially when you are partially responsible for state of the parastatals,” Mathekga said. There needs to be a practical strategy to deal with these issues, he added, and the next issue is a symbolic war. “It’s a difficult one that he cannot win now, but he can make incremental gains by dealing with practical issues.”
He added: “At what point can we say he has had enough time to demonstrate [his abilities]? People won’t give him that time; he needs to show leadership at every juncture.”
Mathekga said Gigaba could do this by taking small steps to distance himself from the Guptas and the line of patronage. He could apply strict limits to parastatals such as SAA and Eskom and enthusiastically support any efforts to reform them.
There is no time to wait and see, Mathekga said. “We are going to have to be unfair; we can’t give him time to prove himself.”