Stumbling, but still standing

SETBACKS: SOUTH AFRICA’S CURRENT FISCAL SITUATION IS NOT SUSTAINABLE

Eskom’s debt, government borrowing and a possible credit ratings downgrade are problems.

The FTSE All-Share Index was negative in July, declining 2.4%. The 2019 return of 8.6% is still decent, though it hasn’t made up for 2018’s losses. In a market like SA, stock-specific issues can move the benchmark. The list of companies reporting poor capital allocation decisions, particularly offshore acquisitions, is growing.

But macroeconomic conditions and policy uncertainty also play a role for slightly less than half the local market exposed to the domestic economy. The International Monetary Fund cut SA’s 2019 growth outlook to 0.7% and 2020’s to 1.1%.

The most immediate domestic problem remains Eskom.

Government borrowing in the current fiscal year could rise to almost R300 billion to accommodate the Eskom bailout and disappointing tax revenues.

Borrowing costs are higher than nominal economic growth, indicating the current fiscal situation isn’t sustainable.

Usually increased government borrowing (a larger budget deficit) is considered positive for short-term economic growth.

If the borrowed funds are invested in infrastructure, it’s good for longer-term growth, too.

Unfortunately, this money’s being used to fund Eskom’s interest payments.

Consumers are increasingly looking for cheaper alternative sources of electricity and reducing use. Eskom’s sales, therefore, declined over the past year.

Hiking tariffs to compensate will chase more customers away.

The appointment of a chief restructuring officer is an important milestone, but ultimately, the biggest stumbling blocks to restructuring are political, not technical.

Further credit ratings downgrades are a possibility and bonds, rate-sensitive shares and the rand have come under pressure in the past two weeks.

How much do credit ratings really matter though?

Markets will latch on to a credible reform story, especially as interest rates globally are falling and the search for yield is on.

Unfortunately, SA doesn’t yet have a credible reform story. But this can change.

Mohr is chief investment strategist and Odendaal investment strategist at Old Mutual Wealth

Picture: Shutterstock NO SPARK. Usually increased government borrowing is considered positive for short-term economic growth. Unfortunately, this money’s being used to fund Eskom’s interest payments.