Funding for cash-strapped SOEs could strain fiscus - economists

Johannesburg – Economists will be keeping watch on government guarantees for state-owned enterprises (SOEs) in the medium-term budget policy statement (mini budget) to be given by Finance Minister Pravin Gordhan on October 26.

In a telephonic interview with Fin24, Investment Solutions chief economist Lesiba Mothata said he was looking to see if National Treasury would expand its government debt guarantee beyond R500bn.

This follows news that power utility Eskom signed a R7bn credit facility agreement with China Development Bank. “Who will provide collateral as a last resort if things go pear-shaped?” he asked.

READ: China Development Bank's R7bn not for nuclear - Molefe

Among other SOEs, Eskom takes the “lion's share” of these debt guarantees. In terms of finances, the rest are “insignificant” in relation to Eskom, he added. According to data from Treasury and Momentum Investments (MMI), Eskom accounts for 66% of guarantee exposure for the financial year 2015/2016. This is followed by the South African National Roads Agency at 14%; South African Airways accounts for only 5%.

Guarantee exposure (% of total FY15/16)

Now that Eskom has been designated as the procurer for the 9 600 MW nuclear build programme, the question about guarantees has become prominent, explained Mothata.

According to a report by MMI on the mini budget outlook, there is still a risk that the need for government support may increase, although Eskom’s revised projections show cash reserves are likely to exceed R150bn in 10 years’ time.

MMI economist Sanisha Packirisamy echoed these sentiments. Packirisamy explained there are concerns that “cash-strapped” SOEs may need additional guarantees.

Treasury warned that increasing funding difficulties of SOEs could contribute to the rising level and cost of borrowing. Reform of SOEs is still a long way off, stated Packirisamy. The Presidential Review Committee released a final report on SOEs in 2013 which included recommendations for developing a long-term strategy.

Mothata added that the implementation of reforms in the sector needs to be clarified. “There is a lack of clarity stalling reform in SOEs,” he said, adding that Treasury’s response to rating agencies’ concerns around SOEs' financial stability will also be on the radar.

According to MMI government net debt, together with guarantees and contingent liabilities, is just below 70% of GDP. This exceeds Standard and Poor’s (S&P's) 60% of gross domestic product guideline.

Rating agencies will look at economic reforms. “This is a grey area, it does not have legs,” said Mothata. However, he added that the minister may be “upbeat” about growth and sound more “bullish” than when he announced the Budget Speech in February.

S&P is likely to leave its rating unchanged, said Mothata. According to MMI, a reduction in fiscal flexibility may not influence the foreign currency rating.

In the past S&P warned that a downgrade could happen as a result of weaker growth, a further decline in wealth levels, the weakening of institutions, a delay in structural reforms and a rise in net debt and guarantees ratio to GDP above 60% over the next three years.

ALSO READ: S&P warns what's happening in SA more than just political noise

“We still expect South Africa to be downgraded to sub-investment grade by S&P over the next nine months as sluggish GDP growth poses a risk to fiscal consolidation and debt stabilisation in the medium term,” stated Packirisamy.

Mothata added that Treasury independence raises concerns but will not translate into a downgrade. The political interference will be regarded as a “negative” contributing factor that needs to be monitored. 

Government debt and guarantees

Debt levels

Treasury expected net debt to stabilise at 46.2% of GDP at February 2016. This may be revised higher, according to MMI. South Africa’s foreign currency debt is over $4bn. Although this borrowing is over the long term, currency depreciation could make debt larger resulting in problems going forward, explained Mothata.

Gross debt is currently 53% to GDP, relatively high to economic growth, said Mothata.

* Visit our Budget Special for all the budget news and in-depth analysis.