(John McCann/M&G)
COMMENT
The smart money is already leaving the country ahead of two looming dates on the economic calendar, a news agency reported this week. The dates are October 30 — when Finance Minister Tito Mboweni tables the medium-term budget — and two days later, November 1 — when Moody’s announces whether the country’s debt is still investment grade.
The gravity of the situation has been communicated to the powers that be. In a presentation — marked “secret” — to the national executive committee (NEC) of the ANC last weekend, Mboweni showed the alarming decline in tax revenues against budgeted estimates that have increased in the past three years by -30%, -49% and -57%.
Mboweni said this decrease is “despite additional taxation measures being put in place — including the one percentage point increase in VAT [value-added tax]”.
His presentation showed that government spending has been rising, even without taking the money spent on propping up state-owned enterprises into account. This is because of generous wage agreements for civil servants and widening social-grants coverage.
The finance minister said interest rate costs have been the fastest-growing expenditure item for the past 10 years, displacing real spending.
“We need urgent progress on reforming institutions that are a drag on our current performance,” Mboweni told the NEC, warning “that action now can avoid even greater pain later and that, if no corrections occur, even in a slow environment, we face greater adjustments in three years time”.
Bloomberg reported this week that, with still a month to go until Moody’s reviews South Africa’s sovereign rating, foreign investors are not taking any chances. Overseas ownership of South African government debt fell to 37% of the total at the end of August, from as high as 43% in March 2018, according to national treasury data. “That’s the lowest level since February 2017, suggesting some investors aren’t waiting for Moody’s to downgrade the country to junk — a move which would see it removed from Citigroup’s World Government Bond Index (WGBI), sparking forced sales by investors who track the gauge,” Bloomberg said.
Mboweni’s presentation to the NEC drew heavily on a document he released some weeks ago, which immediately drew flak — from organised labour in particular — as it was made available for public comment, rather than first being sent to the ANC’s tripartite alliance structures.
But in a post-NEC briefing by secretary general Ace Magashule, it appears that Mboweni’s mooted reforms in the areas of infrastructure, competitiveness, ease of doing business, agro-processing, tourism, subsidising inefficient state-owned companies, promoting labour-intensive growth and supporting small business, have largely been accepted.
But the extent to which the responsible ministers will implement these reforms remains to be seen.
An exception to the general acceptance of his proposal was Mboweni’s call to reduce “the extension of collective bargaining agreements which favour big business and big labour to the detriment of the unemployed and small business”. This mooted reform will be sent to the National Economic Development and Labour Council for further deliberation.
But the elephant in this room that will need addressing if any of the mooted reforms are to work, is fixing the broken Eskom. And with a Boris Johnson-type guillotine less than a month away, there are numerous, competing options for the way forward. These include auctioning Eskom’s power stations, accessing a green-financing mechanism linked to an agreed timetable to phase out coal, a transfer of Eskom’s debt to the government’s balance sheet, a strategic equity partner and swapping Eskom’s debt for equity.
Mboweni’s reform document argued for Eskom’s power stations to be put on the auction block to wipe out the utility’s R450-billion debt, a proposal that appears to have limited traction in policy-making circles, with one participant saying such a sale would be unlikely to raise this much money.
South Africa, together with other cole-intensive countries, was not granted speaking rights at the United Nations’ climate summit last week because of our disproportionate contribution to the climate emergency. But President Cyril Ramaphosa said in a statement that a proposed $11-billion just-transition transaction was being developed, which would be the largest climate finance deal to date, and which would have a significant effect on emissions.
The plan, which is yet to be released for public scrutiny, was formulated by Meridian Economics and envisions Eskom being loaned money by global development finance institutions at concessionary rates on condition it accelerates the closure of polluting coal plants in favour of renewable energy.
But the ANC’s economic transformation head, Enoch Godongwana, speaking on Tuesday at an asset management industry function, said he did not support the creation of a special-purpose vehicle to take on Eskom debt. Neither did he back the green transaction in the form currently being proposed.
“Eskom has debt of R450-billion and it can service R200-billion, so they need to offload R250-billion. My view is that we should put that into the sovereign, instead of complicating the structure”, Engineering News reported him saying.
The markets, Godongwana argued, would understand such a transfer and would also accept the associated “spike” in the government’s fiscal ratios, such as debt-to-gross domestic product and the budget deficit. Godongwana said five international investors over the past two weeks had indicated a preference for a simple arrangement that did not further complicate the structure.
A statement released by the ANC after the NEC meeting said priority areas discussed included the restructuring of Eskom, and tackling its unsustainable financial position as well as those of SAA, Denel and other state-owned enterprises. “The long-standing ANC policy with respect to strategic equity partners in various state-owned companies [was agreed]; and consideration will be given to models of worker and social ownership.”
So, there appear still to be multiple options on the table, including an auction, a blended green-finance facility, a transfer to debt from utility to sovereign, and an equity partner, which might include worker or social ownership.
Godongwana told a media briefing that funding for Eskom would be complete when Mboweni makes his medium-term budget statement on October 30. Mboweni added little, saying: “I’ll have things to say in my government capacity, not here.”
Matthew Parks, the parliamentary officer for trade union federation Cosatu, says the plan to save Eskom is a ticking time bomb scheduled to go off at the end of October.
After “18 months of dithering, the situation is extremely worrying”, he said. “A serious narrative on the way forward is needed.”
Parks says a range of bilateral talks between ministers and organised labour are scheduled. A high-level task force, which will meet at Nedlac from mid-month, has also been constituted. One option is for the Public Investment Corporation to swap the R104-billion in Eskom bonds that it holds, for equity.
But, says Parks, there would have to be a proper audit of all Eskom’s finances, including its coal contracts, for this to happen, as pension funds need to see that their investments can generate a profit before they put money in.
Another initiative, between the ministers of public enterprises and energy — Pravin Gordhan and Gwede Mantashe, respectively — with independent power producers, has suggested “a haircut”, that is, lower tariffs, perhaps in exchange for extending the life of these contracts.
Bloomberg said the sell-off of South African bonds was “despite the fact that South Africa’s yields are the highest in the WGBI, which requires an investment-grade rating from either Moody’s or S&P [Global] Ratings and is tracked by investors overseeing as much as $3-trillion.”
“Investors who would be forced sellers in a downgrade — some of them have sold,” Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management, told Bloomberg. “Ramaphoria clearly has died,” he said.
A credit downgrade will mean a higher cost of borrowing and a further straitened economy and fiscus, resulting in less growth and opportunity, fewer jobs and more potential discord. So it is alarming that our policymakers dither while a Boris-type clock ticks down.