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Prescribed assets a better option than IMF bailout – Magda Wierzycka

Going cap-in-hand to the IMF is essentially handing over control of the country’s finances.

NOMPU SIZIBA: South Africa’s debt metrics are increasingly becoming a worry and this has been flagged by the rating agencies, and even business representatives have piped up to say that the situation warrants urgent attention. Moody’s indicated yesterday that in fact the state needs to be giving Eskom even more support than it has already, and this comes a short while after finance minister Tito Mboweni indicated that Eskom would be getting an addition R59 billion over this and next year, with the main aim there being to assist the utility to basically service its humungous annual debt costs.

At its financial results briefing last week, Eskom indicated that its debt now stands at around R440 billion. Rating agencies consider the utility to be the single biggest risk to the local economy. Meanwhile, with the economy barely growing, tax revenues are consistently coming in below estimated levels, which means the state having to borrow more money on the debt markets to finance Eskom, other state-owned enterprise bailouts, and other priorities – which is just not sustainable.

So, with all this, are we edging closer to a stage where we may need assistance from the International Monetary Fund? And, if that were to occur, what would an IMF bailout possibly look like?

Well, Magda Wierzycka, who is the CEO of Sygnia, has taken an interest in this issue, and she joins me on the line. Thanks very much, Magda, for joining us, and welcome. Some people listening to us may worry that commentators and observers of South Africa’s debt situation and economy at large may be venturing into the realms of scare-mongering with this talk of us having to possibly go cap in hand to the IMF. What are some of the justifications that can be cited for even entertaining this conversation?

MAGDA WIERZYCKA: I think at this point we still have a little bit of time before the IMF [bailout] becomes a real possibility. But it’s not an unlimited period of time. So, if you look at the economy it isn’t growing. The tax base is shrinking. You have the state-owned enterprises, and in particular Eskom, and I think everything else, if it was privatised, would be better off the balance sheet of South Africa Inc. But Eskom needs to be stabilised. In order to stabilise anything, we can borrow more; but we can hardly afford to do so and we certainly cannot afford a Moody’s downgrade.

Read: What an IMF bail-out will look like…

NOMPU SIZIBA: Magda, before you carry on, we are hearing that Eskom wants the government to take responsibility for the majority of its debt. This is when the government is already spending about 15% of its budget on just servicing the country’s debt costs. Surely, if that were to be agreed to, that would be an immediate trigger for a downgrade?

Read: Eskom wants government to take over majority of its debt

MAGDA WIERZYCKA: Correct. I’m seeing that it would be very, very dangerous. I’m not saying they are going to do it, but I think that would be a very dangerous decision to take. I would rather look at other pools of liquidity available in the country at the moment. I’m only looking at two, and both of them are contentious. But I think let’s be contentious rather than have a downgrade. It’s less contentious than the lights going out.

One thing is obviously looking at the Public Investment Corporation and the money managed by the PIC on behalf of the Government Employees Pension Fund. That’s about R2 trillion that we have available on the balance sheet of South Africa. And, given that the GEPF is a defined-benefit pension fund, it really is an asset of South Africa. So, if we have to deploy it and there’s no point at looking at the history of how we got here, we’re here, that is an asset that I would deploy rather than South Africa borrowing more money in order to bail out Eskom.

The other option – or maybe a supplementary option – is to go back to this concept of prescribed assets. That basically means that every South African contributes. Again, let’s not point fingers, it’s too late for that, but basically even if trading stocks that enjoy any kind of tax benefits would be forced to, perhaps for a period time, 25 years, to invest let’s assume 20% of the assets in government-issued bonds, which would immediately lower the cost of funding in South Africa.

South African takers would require some compensation for that. You could look at creative solutions such as, for instance, relaxing foreign exchange controls, allowing the savings pot to invest 50% of the assets in exchange for 20% being invested in government bonds.

So those are the actual pool, and there isn’t anything else. If we actually take the debt of Eskom onto the balance sheet, and if we are downgraded, then I think we are literally taking 10 steps forward towards the IMF bailout, which is a very ugly picture.

NOMPU SIZIBA: So, paint a picture for us. What does that look like? We did watch Greece from a distance. We would report around what was happening with Greece, their having basically to adhere to the rules of the EU and the IMF. It was very contentious. The Greek people were fed up, people went into poverty, and so on. Just give us a picture of how you see a bailout transposed here in South Africa.

MAGDA WIERZYCKA: I think a bailout is a horrendous thing. The IMF is the bank of last resort. When you borrow money from the IMF, they effectively take over running the finances of the country. We are not talking about a very complicated picture here. The finances of the country are nothing more than a revenue line and an expenditure line. So the revenue line – effectively taxes go up. If you look at Greece, personal taxes were increased to 70%, Vat to 23%. And then the revenue line: immediately wages are cut, in particular for the public sector. Pensions are cut, social benefits are cut, state entities are privatised and there’s a sale of anything spending, literally. You have issues, such as the power of trade unions is diminished because you have abolishments of collective bargaining agreements, because you start retrenching people.

So, very effectively, in exchange for loans, they start to run the finances of the country. Given that South Africa is a powder keg, as we know, we have so many political issues, race-related issues, inequality issues, I think we would see a heck of a lot of what happened in Greece. In Greece you had runs on banks, you had protests in the streets, you had government changes. In South Africa, I think you would see a multiplier effect based on that.

NOMPU SIZIBA: So the social picture could be quite dire for South Africa?

MAGDA WIERZYCKA: Indeed. Very dire for South Africa. I think we can’t lose sight of that. I think that is the bogeyman that’s standing at our door; we should do everything in our power to focus, not on ANC political infighting – because even I am becoming despondent about watching this – and prioritise what is really important, which is running the economy of the country, because if the IMF does it for you, by the way, it’s not a dream that can get you out of a recession. In fact, after IMF stepped in, Greece suffered from the longest recession of any advanced economy since the Great Depression. So it’s not as if IMF bailouts are some panacea to anything. It can cause more havoc, more poverty, more inequality down the line. It’s just kind of a short-term programme to kind of appease your bondholders.

But, having this picture in mind, I think it kind of focuses the mind on what we should be doing.

NOMPU SIZIBA: So, obviously, these are very serious issues we are discussing and you would want to have the ideas that you’ve just raised, in an adult conversation with people around this. I’ve spoken to people from your community, the financial community, around prescribed assets, and it seems as though people are absolutely against it. They feel it would be a nanny state; they feel that they would not be able to invest in areas where they think they’d be able to derive more value.

MAGDA WIERZYCKA: I think that people talk to their book. Very few people can take the bigger-picture view of where we are as a country, as opposed to thinking about your own back pocket. And I think that, if you focus on the short term, that’s where the IMF is kind of literally standing at our door. My view, and I’ve tended to take a much more macro view of things, of basically saying we are in complete disarray as a country. We have no growth, we have poverty, we have rising unemployment. Something has to give, and we need to have a national think tank of the top, be it economists, business leaders, guiding the economic policy of the country. It’s not up to individual portfolio managers. Frankly, I don’t think that they are a voice in this conversation. This is a conversation that should be happening at the national level.

Read: We don’t need prescribed assets

NOMPU SIZIBA: Magda, we are going to leave it there. Thank you so much for your insights on this conversation.

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Using prescribed assets would mean carrying on without any change, simply delaying the inevitable. On the other hand the IMF would require to cut the excess workforce(?) in the civil service and SOEs.

It would actually make matters far, far worse. It would penalize savers, impoverishing them, without addressing the root causes of a bloated public service, AA, BEE and all other communist evils blighting SA. It would also cause any sane saver to severely reduce his voluntary contribution to RAs or company pensions, thereby causing an investment strike by private citizens.

Far better to go after the huge underground economy – taxis, spaza shops, shebeens etc who pay no tax at all. I would suggest radically reducing the cash in circulation, forcing people to use traceable and taxable electronic transactions. Also actively start switching off power to those who don’t pay, such as Soweto.

The IMF will have a long list of requirements, such as reduction in excessive salaries, redudced debt, rational policies, etc which the ANC masters would have to agree to.
What makes anybody think that they will follow such a regimen?
The country will simply Zimbabwefy and the IMF will walk away.
The IMF is not going to be the answer. The IMF can only help you help yourself.

Do not agree with you at all Magda.
Firstly, with Prescribes Assets, the ANC will channel money into Eskom, Denel, SAA, the Post Office etc. That will be pouring money into the toilet. The looting will continue until these coffers are empty.
Secondly, an IMF bailout – although totally repulsive as it may sound, will force the ANC to cut expenditure, Governments Gravy train, a bloated Civil Service and the generous grant payments to all and sundry.
The ANC have got us into this mess – there is no easy solution, and they don’t have one inkling of a plan. Throwing our money at the problem will not solve anything.
The looting continues.

She’s probably right about social chaos after an IMF bailout, but that would be an outcome of political chaos. Prescribed assets would allow politicians to keep plundering without needing to undertake political and structural reforms.

5 years later, we’d be back at the IMF’s door anyway, except by then, everyone’s pensions would be gone too, poured into the bottomless pit of maladministration without consequences.

Disagree Magda, I think you’ve lost sight of the objective here.

Prescribed assets are just another hefty wealth tax which will chase away the 5% who pay tax in SA forever.

It doesn’t address any of the causes of the mismanagement of the economy. IMF bailout would address mismanagement painfully, but SA would have a better chance of long term recovery.

Ironically I think Magda misses the bigger picture. To throw more money at Eskom, be it via the PIC or prescribed assets, is not going to solve its problems. Magda did not mention the crux of the problem. That is BEE. BEE allowed for the appointment of thousands of incompetent workers, as well as hundreds of BEE contracts that either cost the company more or did not deliver quality products/services. There is Medupi today, a great and expensive (R200bn) monument to BEE, 5 years after commissioning, still not working. Forcing the PIC or prescribed assets to lend Eskom (buying bonds) more money is like giving an alcoholic more booze. My solution would be to fire 60% of Eskom employees and appoint on merit, privatise into many small companies. Get rid of BEE contracts which is only a platform for massive corruption. Government will need to take over Eskom’s debt. If the PIC fund Eskom debt , government will still be indebted to the PIC, what the difference?. If government cut Eskom’s operational cost and take over its debt, SA will not get a downgrade. Any solution will come at a cost. SA is running a socialist system with a very small tax base. That will never end well.

No … I think this woman truly sees things clearer than most of you who disagree with this article. Give her judgement some respect – she is much more clued up and one of the most successful business people in South Africa. I strongly agree with this article.

We must realise that there isn’t any good outcome here for the situation we are in. No option we follow will be good. The ANC will not go for an IMF bailout (it won’t happen in my opinion, so just ignore that option and don’t spend dead-time exploring it.)

So what remains on the table then …

It doesn’t help that you bang your ahead against the argument of the “ANC must fix themselves and Eskom must fix themselves, it is not the tax payers problem.”

Out of everything that remains, prescribed assets is the least damaging overall. It doesn’t help to complain that this is an additional tax – the money is going to come from somewhere and one way or another it is going to hurt everybody, and significantly so.

Would you prefer the value of your pension tanks to worthless because of depreciation in Rand, or would you live with a reduced pension? If not prescribed assets, then heavy taxes, or worse …

“Would you prefer the value of your pension tanks to worthless because of depreciation in Rand, or would you live with a reduced pension?”

Or (c), none of the above. Invest offshore and when the rand hits R100 to the dollar, you pay off all your debts in dollars and live like a king.

Johnny – I question her business acumen – she heads up Sygnia and I bought shares in the company shortly after launch when the price supposedly stabalised – share price down 27.14% – maybe she needs to concentrate on her businesses more and less on solving the countries tenuous situation with hair brained alternatives

The question here is not whether Hell A or Hell B is better?

It’s “How do we fix the root cause of the failed economy?”

Options
1. Let the IMF force policy changes
2. Mixture of asset seizure, capital flight, money printing, debasement of currency, raised taxes etc. while keeping failed policy the same.

Only a fool does the same thing over and over expecting a different result.

This is a no brainer.

Unfortunately that seems to be what the ANC is, a gathering of fools.
The organisation is driven by failed economic theories and dogma.

The point is that for prescribed assets to work, the SOEs would have to in effect be “privatised”/commercialised. Otherwise good money flushed away.

This is a PRECONDITION for Magda W. theory to work. So the retrenchements of surplus staff, instillation of discipline, merit appointments, performance payments and end of corruption would have to happen.

Likely?

Most of the arguments here also seem to be saying that an IMF bailout doesn’t fix the fundamental issue of mismanagement. No option that we have (and that the government will go for), is going to fix the issue of fundamental mismanagement. Therefore, but focussing your arguments on addressing the fundamental problem, any solutions you propose is going to either not be implemented or go nowhere.

We need to do something about this problem. Critically, this involves going with an option that is least damaging and that will actually be implemented.

What happens after we get out of the immediate mess, is a separate issue. You can’t and won’t fix both things at the same time.

I’m not fond generalisation, however, in this case I’ll make an exception. The state of the economy, our SOE’s and essentially every other department/function of the state has collapsed as a result of government officials (who receive incomprehensible remuneration & ‘God-like’ privileges), so too should it be their pensions on the line… That way there is accountability and a hard, necessary lesson learned.

Government is not a business or a company! Certainly not SA’s government, since they can’t turn a profit, or even maintain fully functional entities which they were entrusted with. They cannot achieve this, despite the fact that they regulate and create the environment in which business affairs must conform to.

The IMF route is more likely to spark conflict and deepen racial divides. The irony therein being that, a bit more than a quarter of a century after Apartheid, SA would find itself in a similar situation. Yet, this time it volunteered…!

And there it is…this women is INSUFFERABLE. Basically saying that Africans will riot harder and more chaos from IMF loan than prescribed assets. How out of touch is this foreigner. Why more chaos from people that already have nothing? And when the money runs out in a few years?back to IMF anyway. Maybe think longer than 30 seconds than your Steinhoff analysis. Get your money out of country and away from the government. US stocks, Glocks, property and crypto.

Utilizing prescribed assets rather than IMF bailout, simply amounts to kicking the can down the road. That is all. The IMF bailouts will still follow, just… later.

Magda as usual talking her own book. Precribed assets will lead to increase in the portion of assets held in fixed income, which will benefit the peddlers of multimanaged products like Sygnia and will be to the detriment of the big equity fund managers

This lot has a tendency to forever do the wrong thing. Like children they need guidance from someone who can enforce it.

Take your money and run.

Prescribed assets also mean a whole new category of investment fees to a captive public at no risk to fund managers. Sorry, Magda, but the productive people in this country trust the IMF far more than the government or the investment houses.

Used to think Magda knows her stuff…not any more.

That’s all well and good Magda, but who then is going to enforce policy change…..uhh no-one, a short while from now we read an article how pundits like yourself are advocating an IMF bailout to enforce policy change because now there are also no pension funds to pilfer…

End of comments.

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