(John McCann/M&G)
There is a slim chance that the budget delivered on Wednesday by Finance Minister Tito Mboweni may be just enough to stave off any immediate action by credit ratings agency Moody’s.
But whether the country will still be holding on to its last investment grade rating by the end of the year will depend on evidence that the substantial bailout the treasury has allocated to Eskom will result in meaningful change, economists say.
In his speech, Mboweni revealed a marked deterioration in the government’s finances, driven by poor economic growth, shrinking revenue and additional spending pressures. The biggest of these is the R69-billion Eskom will get in the coming three years to service its debt.
But more support, amounting to about R150-billion in the coming 10 years, is likely to be needed after this, a treasury official confirmed, although this will depend on other factors such as what tariff increases Eskom gets and the implementation of its turnaround strategy.
The real effect of the extended assistance for Eskom is evidenced in the forecast of the country’s debt-to-gross domestic product ratio, which will peak at 60.2% of GDP by 2023-2024. This figure falls outside of the current medium-term expenditure framework for the next three years, which the treasury uses in its published budget forecasts. In the 2019 budget, the framework goes up to the 2021-2022 financial year.
Eskom was the only state-owned entity (SOE) to get a cash injection but other perennially troubled parastatals received more government loan guarantees. This and obligations to other public sector institutions such as the Road Accident Fund will take the state’s contingent liabilities to more than R1-trillion by 2021-2022. Arms manufacturer Denel was granted a further R1-billion guarantee and loss-making SAA’s guarantees were increased by R6.2-billion.
The added spending pressure, and most notably Eskom’s bailout, has meant that, although the state is sticking to its self-imposed spending ceiling for the current 2018-2019 financial year, it has breached it for the following years. Mboweni announced that the expenditure ceiling will be raised by R14-billion in 2019-2020, by R1.3-billion in 2020-2021 and by R732-million in 2021-2022.
The main budget deficit is now expected to rise to 4.7% of GDP in 2019-2020, 4.5% in 2020-2021 and 4.3% in 2021-2022.
The deputy managing director of Investec Asset Management South Africa, Nazmeera Moola, said it was important for the government to provide a plausible, credible plan for Eskom in the next few weeks.
“Without that, there is still a risk that Moody’s moves the outlook on South Africa’s debt from neutral to negative. And that is our last remaining investment-grade rating and that would be a problem,” she said.
Moody’s has South Africa one notch above junk status, with its outlook at stable. Its peers Fitch and S&P Global have both downgraded South Africa to subinvestment grade.
“If they produce a plausible, coherent plan, with imminent implementation … then I think Moody’s could stay on hold for now,” she said.
But the treasury had made a “heroic effort” to curb expenditure elsewhere, notably the public sector wage bill, which is positive, Moola said.
Mboweni for his part acknowledged that “difficult conversations” with ratings agencies lay ahead. But the state’s firm stance on driving down the wage bill and changes to the guarantee framework for SOEs should be viewed as positive by the ratings agencies, he said.
Accompanying the funding to Eskom was the planned introduction of a chief reorganisation officer (CRO) at the utility, who would implement the recommendations of the presidential task team, established to find solutions to Eskom’s extensive financial and operational problems.
“If we are doing practical things to fix Eskom or the electricity sector, in my view that should be viewed as positive [by ratings agencies],” Mboweni said.
The treasury made it clear that, beyond the medium term, the extent of its support for Eskom will depend on several factors, including economic growth, tariffs and the implementation of Eskom’s strategy. The treasury highlighted some initiatives that would be key to the utility’s turnaround, including managing its primary energy costs with prudent long-term coal contracts.
The utility has also committed itself to driving down its costs by R20-billion a year by 2022, excluding cuts in its salary bill.
Keener scrutiny of what all other parastatals do with public money is also on the cards. Mboweni wants the rules for extending guarantees to other SOEs to be tightened and to include the appointment of a CRO, to be done in conjunction with the treasury and the entities’ bondholders. He likened the process to being placed under curatorship.
“You want money from us; we’ll put you under curatorship,” Mboweni said.
The CROs would work with the boards of parastatals and their management to guard taxpayers’ money, Mboweni said. “There’s no free lunch here — this is taxpayers’ money; we must look after it.”
But the Eskom bailout has meant the treasury was able to make a case for bigger cuts elsewhere in the budget, especially in the public sector wage bill.
A total of R27-billion will come from cuts to national and provincial compensation budgets, beginning with early retirement packages for older public servants, which is expected to save R4.8-billion in 2019-2020, R7.5-billion in 2020-2021 and R8-billion in 2021-2022. This is based on the assumption that about 30 000 employees will take up the offer.
The state is also looking at phasing out performance bonuses and is encouraging public entities to freeze the salaries of employees earning R1.5-million or more a year, and those earning between R1-million and R1.5-million a year would receive a below-inflation increase of 2.85%.
Although these steps may be seen to be positive, the risk of a Moody’s downgrade remains.
Its lead sovereign analyst for South Africa, Lucie Villa, said in a brief note after the budget was delivered that it showed a further erosion in fiscal strength.
“Government support for Eskom, which will be only partially compensated by a reduction in other spending, and revenue underperformance lead to a renewed upward revision in fiscal deficits and debt levels, while contingent liability risks persist,” she said.
A Moody’s downgrade is expected to trigger a substantial exodus of money, because South Africa will fall out of important global indices, such as the World Government Bond Index, which major global institutional investors track.
At the budget press briefing, South African Reserve Bank governor Lesetja Kganyago said the central bank had evaluated the resilience of the banking system if this should happen.
Such an event would have implications for the cost of capital in the country, which in turn would have an effect on investment and thus on economic growth and employment, he said.
“And, if you [have] fewer people working as a result of that, those people will not be able to service their debt … and that feeds into the banking system,” he said.
Nevertheless, even in an extreme scenario, which would entail reduced economic growth for five years, the country’s banks had enough capital to withstand it, Kganyago said.