Private sector can save state enterprises
Now that Finance Minister Malusi Gigaba has presented his medium-term budget policy statement, investors, credit ratings agencies and taxpayers are questioning the fiscal sustainability of the South African balance sheet.
The most favoured methodologies for evaluating fiscal sustainability are based on steady-state debt output ratios implied by stationary, growth-adjusted government budget constraint, or econometric tests of the intertemporal government budget constraint.
Simply, the goal of the analysis is to determine whether the government is living “within its means” and to facilitate the assessment of corrective policy measures.
In the medium-term budget policy statement SA’s gross loan debt is expected to increase from R2.5-trillion, or 54.2% of GDP, in 2017-18 to R3.4-trillion, or 59.7% of GDP, in 2020-21.
Given that growing public debt has traditionally been an indicator of financial weakness and vulnerability to crisis, there is concern for assessing whether these high debt levels are in line with the solvency of the public sector or should be taken as a warning that requires policy intervention.
SA’s projected GDP growth for 2017, forecast at 1.3% at the time of the 2017 budget, has been revised down to 0.7%. GDP growth is expected to increase slowly, reaching 1.9% in 2020. Without higher economic growth or additional steps to narrow the budget deficit, the debt-to-GDP ratio is unlikely to stabilise over the medium term.
In addition to the main budget deficit, the government needs to refinance maturing debt. Debt redemptions that need to be rolled over will rise to R109.3bn in 2019-20, mainly due to large foreign loan redemptions. According to the medium-term budget policy statement, the refinancing will be done at higher forecast longterm interest rates.
The gross borrowing requirement — defined as the sum of budget deficits and funds required to roll over debt that matures during a year — is projected to increase from R248.3bn in 2017-18, to R333.5bn in 2020-21. Over the medium term, the gross borrowing requirement is close to R1-trillion. The refinancing of Treasury bills with maturities of less than a year amount to R1.6trillion over the same period.
This cannot be sustainable, particularly when households, investors and ratings agencies lack confidence in the capacity and capability of the state.
Under a low-growth scenario, Gigaba needs to look at mobilising the private sector as a strategic partner in key state companies including Eskom, Transnet, South African Airways and Denel.
Since 2012, the profitability of state-owned enterprises has declined due to a combination of operational inefficiencies, governance failures and weak demand. This decline is a result of state capture, which repurposed enterprises to serve the private interests of those close to President Jacob Zuma.
These factors have increased reliance on borrowing to fund operations, leaving several entities heavily indebted.
Not only will strategic equity partners strengthen governance, they will also assist in recapitalising these failing entities and bring in knowledge and technology that could return them to profitability.
Enterprises that have been able to roll over maturing debt have done so on an increasingly unsustainable basis, with shorter repayment terms, higher interest rates or reliance on government guarantees.
This should not be the case. Gigaba can reduce the guarantees and restore confidence by bringing in private partners while persuading his comrades to buy into the idea of a total exit by the state, to stave off the probability of default in 2021.