Founder: Turnaround Talk
January and February signals the opening of Parliament. During his State of the Nation Address the President of the country discusses the challenges that the country currently faces and how these challenges will be addressed. The National Budget at the end of February details how this plan will be financed.
Issues of national importance usually take centre stage during these discussions. In 2020 and 2021, much of the focus was on South African Airways and the plans to address the company’s financial distress. This is still ongoing and will be until the strategic equity partner finally plays an increased role in the company. The Mango issue also needs to be resolved and it seems as if the courts will oversee this process.
Expect the energy crisis to take centre stage in the Finance Ministers Speech on Friday. There are plenty of concerns about a total blackout with a grid failure a foremost concern for business and the public alike. The fact that the country is currently operating on only 50% of the total electricity needed to run the country is very concerning.
While operational challenges need to be addressed, one cannot do this effectively while Eskom has a significant debt burden. This then will be the part of Enoch Godongwana’s speech that opposition parties will pay particular attention to.
A challenging task
The Bloomberg article points out that Finance Minister Enoch Godongwana faces the task of incorporating a credible debt-relief plan for the stricken state power utility in the national budget while stabilising government finances as record blackouts weigh on the economy.
The minister said in October the state will absorb between one- and two-thirds of Eskom’s liabilities of about R400 billion. The amount and some of the transfer terms are likely to be announced in his February 22 budget. Nine of seventeen economists surveyed by Bloomberg reckon the government can afford to assume half the utility’s loan obligations without compromising efforts to reduce the budget deficit and rein in debt.
The article adds that Reducing Eskom’s liabilities will allow the loss-making company to raise funds to carry out plant maintenance and strengthen the power grid. But it will also add to the state’s overall debt burden of almost R5 trillion and to its debt-service costs, the fastest-growing expenditure line item for about a decade.
Photo By: National Treasury
Previous commitment
Godongwana has previously said the National Treasury will make relief contingent on Eskom meeting performance targets and the transfer of funds will be staggered. He does not envision the utility’s bondholders being asked to take haircuts, which would be tantamount to default.
The Bloomberg article points out that the plan “won’t necessarily overturn the apple cart, but if government debt is not carefully managed and Treasury fails to follow through on consolidating public finances, South Africa will likely struggle to avoid going off a fiscal cliff,” said Jee-A van der Linde of Oxford Economics Africa.
Record blackouts will complicate Godongwana’s efforts to convince markets that key fiscal metrics, including the budget gap and primary balance, will improve. The outages cost the country as much as R899 million per day and have prompted the central bank to cut its 2023 economic growth forecast to 0.3% from 1.1%.
The article adds that the Treasury will revise its economic growth outlook, but cutting its forecast nominal GDP values “too drastically wouldn’t be judicious,” said Annabel Bishop, chief economist at Investec Bank Ltd. The Treasury “would do well to err on the side of caution and not collapse its economic growth forecasts as drastically as the South African Reserve Bank” as that will worsen debt-to-GDP ratios and the projected health of government finances, she said.
Pay concessions for civil servants and increasing welfare pay-outs may also weigh on the spending framework as the ruling ANC tries to shore up support before elections next year. The state’s wage bill is likely to overshoot previous budget estimates, according to 78% of respondents in Bloomberg’s survey, while 41% see a chance of a basic income grant being announced before the vote.
Losing ground
Several opinion polls show the ANC risks losing its national majority in 2024.
The Bloomberg article points out that while South Africa has benefited from windfall revenue buoyed by higher commodity prices and mining company profits, severe power cuts and state-owned port-and-rail operator Transnet’s difficulties in getting goods to harbour for export may curb future collections.
Government relief to offset food price inflation and tax breaks for business and households that self-generate power may further cloud the fiscal outlook. Transnet, which has breached its debt covenants, is also likely to receive a bailout, according to 71% of the economists polled by Bloomberg.
The article adds that South Africa considers the primary budget balance its most critical fiscal anchor. More than half the economists surveyed see the shortfall swinging to a surplus in 2025, a year later than the Treasury previously forecast.
Photo By: Canva
Some animals are more equal than others
Last year February, Turnaround Talk published an article which pointed out that Government warned underperforming SOEs to reconsider darkening Governments door with requests for a bailout. They were effectively told that they need to play by the rules and that they also need to become self-sufficient.
Transnet has taken this to heart and is about to embark on a privatisation programme. The South African Post Office is embarking on a retrenchment drive to try an educe the overheads of the company. Given that there are many economists who feel that Eskom is similarly over staffed, it should follow suit. Whether it will is another story. Finally, SAA was told that the only way it will receive additional funding is through a private equity partner.
This confirms what we already know. In the world of SOEs…all animals are equal, but some animals are more equal than others. Eskom can go to Government hat in hand because the country cannot run without the utility.
One only hopes Government has a concrete plan to save Eskom.
