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