Enoch Godongwana is walking a financial tightrope
The minister of finance needs to perform a delicate balancing act between bailing out the country’s problem child, Eskom, and stimulating an economy in dire need of help
Eskom’s debt bailout request seems to be the uppermost concern for most analysts ahead of the Medium-Term Budget Policy Statement (MTBPS) next week.
Finance Minister Enoch Godongwana indicated in February’s Budget that a solution on state-owned power provider Eskom’s debt would be announced “within the next financial year”.
The minister also has his work cut out for him as the country hangs on the precipice of a potential greylisting early next year. If the greylisting goes through, it is likely to have a 1% to 3% impact on the country’s GDP, as well as introduce more invasive due diligence for South Africa when dealing with local and international financial companies.
From an investment perspective, Citadel’s chief investment officer George Herman urges Godongwana to address the Eskom situation. “We would appreciate any guidance the finance minister can give in terms of the intention to de-leverage the Eskom balance sheet. I think and hope that it is going to be a core focus of the 2022 MTBPS,” says Herman.
Eskom has requested that the government relieve its debt balance sheet of approximately R200-billion, while recently informing the Standing Committee on Public Accounts that it was carrying a total debt burden of almost double that amount, which could not be serviced due to current cash flow and liquidity problems. The beleaguered SOE is also still owed a collective R40-billion by municipalities around the country.
Eskom expects to receive tranches of R20-billion of taxpayers’ money over the next few years to deal with its debt-servicing commitments, much to the dismay of taxpayers, who are already paying for a service they are not fully receiving because of load shedding.
Jeff Schultz, senior economist at BNP Paribas SA, says he expects to see a more detailed road map to finally resolve Eskom’s “legally and technically complex” debt burden, which is roughly 6% of GDP.
“The complexities of a [R200-billion to R250-billion] transfer are large and will likely take more time to iron out, though we deem it plausible that Treasury could opt to take some guaranteed debt onto its balance sheet.
This would raise its direct debt stock but equally reduce its contingent liability exposure.
We only expect a final decision in February 2023,” Schulz says, adding that markets will likely (and rightfully so) want to see additional strict conditionality attached to any Eskom debt solution.
Eskom’s latest tariff application for a 32% hike in the 2024 financial year paints a clear picture of the urgency of its application, with depreciation of its regulated asset base, higher primary energy costs and faltering return on assets accounting for two-thirds of its request.
Pragmatic policies versus populist pressure
When it comes to the economy, Maarten Ackerman, chief economist at Citadel, says the question is whether Godongwana will prioritise pragmatic policies that stimulate real business growth and job creation, instead of bowing to populist pressures that prioritise social spending but have no lasting positive impact on the country.
“South Africa is still stuck in a balancing act between weak growth and populist needs that will continue indefinitely, such as the basic income grant, says Ackerman. “In terms of South Africa’s macroeconomic outlook, it’s essential to note that there was yet another revenue windfall in addition to the revenue overruns in recent years. We’d like to see the windfalls being used productively – not just on once-off, temporary social spending that does little to nothing to drive economic growth,” adds Ackerman.
FNB chief economist Mamello Matikinca-Ngwenya points out that since the Budget speech in February, Russia has invaded Ukraine, sending global economic growth forecasts on a downward spiral.
“Externally, a material moderation in global growth amid the war in Ukraine, a debilitating rise in the cost
of living and tightening global financial conditions have implications for the domestic economy. While the nominal trade balance remains in surplus, growth in export volumes has effectively plateaued and will likely remain subdued as the global economy moderates. Production disruptions and slowing global activity have affected commodity prices…
“Except for coal … the year-to-date prices of major SA commodities such as platinum, gold, iron ore and palladium have softened. Rising global interest rates, risk-off sentiment and a weaker exchange rate could push government debt-service costs higher, putting pressure on spending,” she says. Matikinca-Ngwenya notes that the revenue base remains challenged by subdued employment growth, with full-time employment still below the pre-pandemic level. According to Stats SA, total employment in the three months to June fell by 119,000.
The minister also has his work cut out for him as the country hangs on the precipice of a potential greylisting early next year. If the greylisting goes through, it is likely to have a 1% to 3% impact
on the country’s GDP
Ackerman cautions that when it comes to the country’s debt-to-GDP ratio, how the revenue overrun is used (or misused) is of grave importance. “Our debtto-GDP ratio is already far higher than it’s been over the past decade. The deficit also poses a risk, so the fact that we are seeing slightly better numbers doesn’t mean the difficulties are behind us. If anything goes belly up, we’ll be close to the fiscal cliff again that Minister Tito Mboweni warned us about,” he says.
Schulz is of the opinion that spending slippage on public wages, state-owned companies and disaster relief following the floods of the second quarter seems inevitable, though not enough to prevent an earlier return to a primary surplus by the 2023/24 financial year. “Overall, we expect the general narrative of the MTBPS to remain one of prudent caution, treading carefully amid an increasingly uncertain environment,” he concludes.