Ditch policies that enable SOE decline and graft
With the bond market giving finance minister Enoch Godongwana’s second medium-term budget policy statement (MTBPS) a nod of approval, one might be forgiven for thinking we’ve managed to avoid the fiscal cliff — especially seeing as the projection now is for a primary budget surplus (the difference between total revenue and noninterest expenditure) of 0.7% of GDP in 2023/2024.
Gross debt is now projected to stabilise at 71.4% of GDP in 2022/2023 — quicker than previously expected. But credibility risks remain largely in the political economy.
Before this budget the major question for the market was whether SA is in a fiscal death spiral, because if we are, if our debt balloons to unsustainable levels and we have to approach the IMF for help, this will precipitate painful change that will cause major political and social upheaval. Some say this may be the only way.
A fiscal death spiral generally occurs when government bond yields exceed GDP growth for a sustained period. As SA has been running a primary budget deficit for 15 years heading into this budget, the news that Godongwana is now targeting a primary surplus one year earlier is critical if we are to avoid the sort of explosive debt dynamic that precipitates societal upheaval.
Godongwana’s determination to hold the line against calls for permanent hikes in spending on a basic income grant and holding firm on public sector wages provide a degree of confidence for now, but as always these are political questions and will have to be resolved using political solutions.
Regarding contingent liabilities the problem is that too many of the largest and systemically important stateowned enterprises (SOES) are holding the Treasury to ransom. While tough love has been the repeated mantra, the reality is that Eskom and Transnet’s balance sheets are still anaemic, and without practically committing to private sector involvement, they will continue to leach off the fiscus and taxpayers.
It was telling that in a Twitter space hosted by Business Day on the evening of the budget, acting Treasury director-general Ismail Momoniat couldn’t answer a question posed by Citibank economist Gina Schoeman about what the framework is for assessing how to lend to SOES. He batted the question away in a session that was dominated by questions about the need to continue lending to firms that consistently deliver negative returns on equity.
I was heartened to some extent at the revelation deep inside the full budget policy statement that — to complement the work of the Presidential State-owned Enterprises Council, which has developed a draft framework to guide decisions on disposing of and retaining SOES — the Treasury has begun developing an SOE funding framework, which will be finalised in the next 12 months.
It has to be expedited because the attitude inside Transnet, which was the recipient of another R5.8bn in taxpayer largesse, remains one of deep denial of the extent of the problems and overt hostility towards the idea of third-party access.
Just last week, Transnet CEO Portia Derby told the 11th annual SA Railways Association conference that its answer to third-party access was to mandate Transnet Engineering to find a leasing company “to enable third parties to lease with us on reasonable terms — one year, two years“, she was quoted as saying.
If this is what the board thinks will unlock third party access and provide a suitably sustainable investment case,
it continues to live in cloud cuckoo land.
Data from Stats SA released last week shows total freight income (nominal) increased 25.7% year-on-year in June-august to R54.6bn. Of this, road freight income expanded at an even faster annual rate of 33.6% to R45.5bn, but rail declined 2.9% to R9.1bn. Overall annual volumes in June-august rose 21% to 267-million tonnes, with road volumes growing 29% and rail volumes declining 11%. And over at Eskom, assuming taxpayers take over half of Eskom’s debt, the risk of moral hazard remains unless the underlying problems are addressed.
Mteto Nyati, who is in charge of the Eskom board’s new business operations performance committee, which has been working closely with management so he and his team can focus on the areas holding the utility back, has not been afraid to wade into politically fraught waters from the get-go.
In a fearless interview with Chris Barron in the Sunday Times, Nyati pointed to the fact that “[i]nternal corruption is largely at the back of empowerment policies that promote local small businesses.”
He added that “these policies will need to be reviewed and changed where appropriate …. The other area where we can help is around skills, and having rigid rules in place around who to employ in terms of equity targets. Isn’t it time for these to become the policy rules and not the exceptions if we are to turn SA around?