Dubious motives

It is an open secret that a substantial number of SA’s 257 municipalities, with a cumulative expenditure budget of R459-billion in 2020/21, are financially mismanaged and in political disarray.

Equally perturbing is that the dysfunction is no longer confined to the country’s backwaters but is spreading out to major centres and towns, including metropolitan municipalities. Theoretically, metros are supposed to be the standard-bearers of effective administration.

Metros cover large geographical territories and councils in these areas are responsible for multibillion-rand expenditure budgets. Metros are also empowered to conduct their own capital-raising exercises to fund their strategic operational needs.

In mid-June, the Office of the Auditor-General released the consolidated general report on 2020/21 audit outcomes for municipalities.

Unlike previous years’ publications, which focused on adverse facts and figures surrounding local government finances and administration, the latest report strikes a reflective note about the underlying drivers of decay in this sphere of the state.

The political environment – which facilitates the entry into institutions of candidates who possess less-than-stellar academic qualifications, who have somewhat dubious motives and who are of high political standing – comes under sharp scrutiny.

Essentially, the sins of the political environment and the kind of excesses it allows are no longer treated as the elephant in the room but are, correctly, identified as the culprit that can no longer be ignored.

It is quite bold for the Office of the Auditor-General not to skirt around the issue nor couch it in polite language that would soften the hard edges of the reality that a poisoned political environment cannot be delinked from the mismanagement of councils.

That is a welcome addition to spotlighting the extent of municipalities’ ability to balance their books, manage resources and assets, and spend state funds prudently.

Another trend in the consolidated report is that the Auditor-General is now taking an institutional approach and perspective in reviewing municipal finances.

In so doing, the Chapter Nine institution acknowledges the limitations of compliance-driven oversight and the fact that clean audits do not necessarily translate into effective service provision for communities.

Clean audits, however, do signal institutional capacity to plan and execute projects. Moreover, councils whose financials get a green tick have a higher probability of effective service provision than those that do not.

The institutional view adopted by the Office of the Auditor-General in its consolidated report on municipalities creates room to construct a long-term and holistic understanding about the consequences of administrative ineptitude and its originators.

The latter reinforces the former. That is deemed to be the case in a province such as the Eastern Cape, home to two struggling metros – Buffalo City and Nelson Mandela Bay – where high political standing tends to hold more weight than academic credentials in determining the calibre of candidates given the responsibility to run institutions.

That, in turn, sets the tone of how institutions are administered, as well as the political and institutional culture that takes hold.

That is why municipal finance offices are filled with unskilled personnel who, in turn, spend billions on consultants’ fees to plug their knowledge gaps – and still do not get appropriate outcomes.

This also creates the problem of rigged procurement processes, with the demands of the political environment mostly at odds with institutional mandates and functions.

Subversion

The priorities of people with high political standing in these institutions are not always complementary to municipalities’ servicedelivery objectives.

In such a context, municipal budgets are not seen as tools and enablers of service delivery. Instead, budgetary resources are treated as an extension of the political process, which privileges those in its ranks as well as those beholden to its networks.

This, in part, explains why tender mechanisms can be subverted to suit preselected bidders and payment approvals are re-engineered to the tune of millions for said bidders while municipalities have nothing to show for such expenditure.

The corrosive effects of the political environment on the fate of municipalities have reached the point where the Office of the Auditor-General has, effectively, lodged an appeal to provincial and national authorities not to look the other way.

But the cruel irony is that even those higher echelons of the state are subject to the same patterns of dysfunction detected at municipalities. The common denominator in all three spheres is a poisoned political environment.

Generally, when interest rates go up in the US, it portends a crisis in emerging markets. The mechanics are straightforward and familiar. When US rates rise, the dollar tends to strengthen, making the foreign currency borrowings of emerging market countries more expensive.

As their credit ratings deteriorate, foreign investors sell their bonds. Their interest rates rise and their currencies weaken.

Rising interest rates put a brake on economic growth, further hampering their ability to generate fiscal revenue and cover interest bill payments. With weaker currencies, the ensuing downward vicious cycle is compounded by higher inflation from the soaring costs of imports, such as energy and food. It is at this point not long before countries run out of foreign exchange reserves, experience a full-blown balance of payments crisis and then, finally, default.

Borrowing in hard currencies such as the dollar has therefore been termed “the original sin” of emerging markets. The first such spate of these crises was in the late 1970s and then the 1980s. More recently, the debt crisis of the late 1990s played out in a near identical fashion.

Now, with interest rates rising sharply in the US and the dollar strengthening, there is an added level of complexity – an energy and food crisis. With the war in Ukraine pushing up the costs of these imports and creating imported inflation across emerging markets, sovereign debt expert Jay Newman told Bloomberg recently it is looking like “a perfect storm for emerging markets”.

Already, the above dynamic has played out with depressing predictability in a number of particularly vulnerable markets such as Sri Lanka and Lebanon. Both countries face a balance of payments crisis, with foreign exchange reserves exhausted. It is practically impossible to obtain fuel, imported food and vital medical supplies on the streets of Beirut and Colombo.

Across Africa there are also worrying signs. Last month, East African powerhouse Kenya decided against issuing a $982-million hard currency USD eurobond and will rather refinance existing USD debt with a loan from a consortium of commercial lenders. Zambia, an unpredictable borrower that has defaulted several times, is also battling to refinance obligations and remains stuck in negotiations with creditors, having negotiated a $1.4-billion bailout from the International Monetary Fund last year.

So far, so it seems, it is business as usual. But now there is one new critical player involved: China. Over the past 20 years Chinese state entities have emerged as the main lending presence to emerging markets across Asia, Africa and Latin America. However, the methods by which they lend are entirely different from those of the West. Fundamentally, the terms of China’s sovereign loans are completely secret, to the point that even loan documentation signed with governments is confidential. In the case of an emerging markets crisis, it is impossible to know how China will engage with borrowers and other creditors. If contagion spreads across the emerging world, it will be critical how this dynamic plays out.

South Africa is in a comparatively better situation than many. First, only about 10% of SA’s debt is in a hard currency like the USD, with the vast majority in rands. This makes SA relatively impervious to a weakening currency, at least in terms of debt serviceability. Second, SA continues to be a big commodity exporter, a valuable source of foreign exchange. Third, SA has not borrowed as aggressively as other African countries from China. And last, the South African Reserve Bank (SARB) and National Treasury are models of monetary and fiscal professionalism, which will go a long way towards placating the fears of investors.

However, with darkening clouds on the global economic horizon and increasing domestic political instabilities, both the governor of the SARB and the minister of finance should be prepared for choppy waters ahead.