Slow-motion crash is about to speed up

IF you have ever had the misfortune of being in a car when the wheel nuts have not been tightened properly, you know that sickening feeling as the steering wheel starts to shake. If you don’t slow down and pull over, it can have disastrous consequences.

The decision by the national executive committee of the ANC last weekend to retain the services of President Jacob Zuma is a slowmotion car crash for the economy. It was as if the party, ignoring the shudder on the steering column, geared down into a hairpin bend and pushed the accelerator hard into the floor, oblivious of the consequences.

History might show it was the tipping point for South Africa’s investment grade, a time when investors finally lost faith in the will of politicians to self-correct.

While not accepting blame for the recent spate of ratings downgrades through his sacking of Pravin Gordhan and Mcebisi Jonas, the president did acknowledge in his budget vote this week that transforming the economy is harder when it is sub-investment grade.

In an economy, as in the case of the wheels coming off a speeding car, a crash happens slowly at first, then suddenly very quickly.

While foreign currency flows into the bond market of about R5-billion a week are lulling many into a false sense of security, parastatals are finding it nigh impossible to raise debt. Transnet struggled to raise a quarter of the R200-million it wanted in April, and the South African National Roads Agency has all but given up on going to the bond market for now. Corporations such as Capitec and MTN have had their bond issues oversubscribed over a similar period.

It turns out Futuregrowth Asset Management had a point last year when it announced it would no longer invest in the debt of six parastatals. It was widely criticised. Parent Old Mutual even apologised for the stance of its subsidiary, and fund manager Andrew Canter rescinded his hard-hitting remarks. He got little public support, but since then, investment in parastatal debt has dwindled to a trickle.

The reality is that parastatals are heavily dependent on public money, and more and more there is pressure on the Public Investment Corporation and the Government Employees Pension Fund to stump up when private investors won’t.

Both have issued statements in recent weeks seeking to reassure members that their money was safe. Why do that unless there are serious questions around their appetite for public debt?

The PIC holds about R2-trillion in state-owned-enterprise debt, which includes 48% of the debt in Sanral and more than half of Eskom’s and two-thirds of Transnet’s. It is already heavily exposed but may feel pressure to fund even more debt unless the private sector can find an incentive to do so.

But in the business environment confidence is at multi-decade lows.

One private-sector casualty of this gloom is Thabo Dloti, whose standoff with the Liberty board over the implementation of strategy cost him his job. The board wanted a speedier return to profitability than Dloti thought prudent, and he stepped aside, making way for David Munro, the third investment banker in under 15 years to make the journey across town from Standard Bank to Libridge to run a business that has been through multiple difficult iterations in recent years. In an environment of low returns and slow growth, the only option may be to take a hatchet to costs. It could get messy.

Messy seems to be the new normal, though. With the government telling Eskom this week to rid itself of its CEO, there are questions about where Brian Molefe might turn up next. He has been linked to a return to the PIC, which manages the retirement savings of civil servants. That’s the last thing they need.

While much SOE debt is government guaranteed, there are worries about state finances. It is short of money, too. When Gordhan tabled his February budget, he anticipated growth at twice the level even the most ambitious forecasters are pencilling in now.

The ANC needs to decide whether it wants to govern a country in the throes of a downgrade. That introspection may see it put country above party come December. Or not.

Whitfield is a public speaker on the political economy and an awardwinning financial journalist and broadcaster