More SOEs set to default

INTEREST PAYMENTS: TO INCREASE 40% TO R69.3 BILLION OVER THREE YEARS

Also, government’s contingency reserve has been drastically reduced.

Moneyweb

More state-owned enterprises (SOEs) are due to default on their debt as their interest payments rise beyond their ability to pay it, National Treasury warns in its medium-term budget policy statement (MTBPS).

Over the next three years, SOEs’ interest payments are expected to increase 40% to R69.3 billion per year (currently R49.8 billion).

Treasury says: “Given the sharp increase in interest commitments, some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability.”

Over the past five years the combined profitability of these entities, “measured by return-on-equity, declined from 7.5% to an estimated 0.2%. A growing portion of their operating expenditure is funded through debt.”

Apart from [SOEs] not being able to afford increasing interest payments, lenders are increasingly becoming fed-up with bad governance, so refuse to extend loans.

“As a result, SOEs are having difficulty raising debt, or are forced to refinance debt at higher rates. This situation creates liquidity challenges, leading to greater demands on the fiscus.”

Government guarantees to SOEs, independent power producers and public-private partnerships currently total R688.8 billion, with total exposure at R455 billion. The difference refers to guarantees not currently used. Treasury admits: “Eskom is experiencing financial turbulence because of weak governance. This has led to a qualified audit opinion and a violation of some debt covenants with lenders.”

Eskom relies on tariff increases to ensure revenue growth as sales stall, but Nersa may give it less than it applies for.

“There are also risks that sales growth will perform below projections, or decline as households and businesses improve their energy efficiency.” Then, Eskom would likely apply for even steeper tariff increases.

Treasury describes a lose-lose situation where “any of the options required to stabilise Eskom could have significant fiscal implications”.

Higher tariffs might limit economic growth, while lower tariff increases may weaken Eskom’s financial position, necessitating another bailout.

The R350 billion guarantees to Eskom have been extended to March 31, 2023 to enable it to complete Medupi and Kusile.

Sanral’s expected to increase its borrowings against its R38.9 billion government guarantees, as it continually battles to collect toll revenue. The MTBPS doesn’t provide solutions to the tolling issue, save to say “difficult trade-offs” will need to be made to prevent deterioration of SA’s road infrastructure, if government doesn’t toll major freeways in future.

Both Denel and the Trans-Caledon Tunnel Authority (TCTA) are at risk of defaulting on their government-guaranteed debt (R1.85 billion R25.7 billion worth of guarantees respectively), due to corporate governance issues and corruption concerns.

And then the cherry on top: “In the long term, government’s ability to deliver water infrastructure could be compromised.”

Further, government’s contingency reserve – recently used to give a R13.7 billion bailout to SAA and the SA Post Office – has been drastically reduced.

“Over the three-year spending period ahead, the contingency reserve amounts to R16 billion [previous MTBPS: R42 billion] … considerably smaller than it has been in previous budgeting cycles.”