Although ratings agency S&P Global offered some optimism on SA’s economic growth outlook, its views on state-owned entities (SOEs) have injected a sobering dose of reality.
The ratings agency doubled its economic growth forecasts from 1% to 2% in 2018, rising to 2.1% in 2019 – higher than the National Treasury’s projections of 1.5% and 1.8% for the respective years.
S&P’s sovereign analyst Gardner Rusike said economic growth might be stunted by government’s failure to stick to debt stabilisation plans and implementing reform measures at SOEs. The financial position of SOEs and their governance structures have played a big part in the credit rating assigned to SA by S&P, Moody’s Investors Service and Fitch Ratings.
In fact, poor balance sheets, rampant corruption and misappropriation of money at SOEs tied to economic growth including Eskom and Transnet have been the basis on which the country’s credit rating has descended deeper into junk territory.
Moody’s recently showed SA grace by keeping its local and foreign currency rating at Baa3 (the lowest investment-grade level) while Fitch and S&P cut the local currency rating from BBB- to BB+ (meaning sub-investment grade or junk).
Rusike said S&P’s revision of economic growth projections is not enough for the rating agency to upgrade the credit rating, as there are still fundamental issues at SOEs. “The government has taken important reform measures to improve governance at SOEs. The measures are also looking to strengthen the business model and financial turnaround to reduce the extent of risks caused by [state-owned] entities. But the reforms are still on-going and we are yet to see progress in some areas,” he said.
Cyril Ramaphosa’s presidency has begun to implement reform measures at SOEs Eskom and South African Airways including the removal of senior executives and board members tied to the Gupta family and state capture project. A state capture commission of inquiry has been instituted to probe influence peddling at state organs and SOEs.
Rusike said the 2018-19 budget tabled in February was much better than October’s medium-term budget as it unlocked additional tax revenue through an increase in VAT to 15% from 14%.
In October, the National Treasury shockingly revealed that public debt will exceed 60% of gross domestic product (GDP) by 2021 – but it has been revised marginally to 56%.
Compounding their financial woes of SOEs is that they struggle to raise money in debt capital markets. The Government Employees Pension Fund extended a R5 billion bailout to Eskom after it failed to raise R20 billion to boost short-term liquidity. Transnet has suffered the same fate after three failed bond auctions in 2017.
In February, S&P pushed Eskom’s long-term debt into deeper junk territory due to ongoing liquidity concerns as it faces debt of over R300 billion amid declining revenue and profit after tax. It downgraded the power utility to CCC+ from B-, with a negative outlook. Meanwhile, on Wednesday Moody’s also downgraded Eskom from B1 to B2, the fifth rung of junk status.
S&P’s corporate ratings director Omega Collocott said there are a number of crisis points in Eskom’s cash flow, making it unlikely that it will receive “sufficient support from the government”.
Arguably, it will still face challenges raising capital from the private sector as its going concern status is still in limbo. For now, one of the private players that are not prepared to open up the money taps to Eskom is specialist fixed-income manager Futuregrowth Asset Management.
Futuregrowth, which manages over R150 billion fixed-income assets, stopped lending to Eskom in 2016 over concerns of poor governance and financial mismanagement.
“As Eskom reforms, makes amends, strengthens its governance, and improves its reporting we would expect to be able to consider resuming channeling some of South Africa’s savings toward Eskom,” said Andrew Canter, the chief investment officer of Futuregrowth.
In February, Futuregrowth released a report titled ‘SOE Governance Unmasked’, detailing various initiatives to reform SOEs. The initiatives include improving the selection and appointment process of individuals; appointing skilled, independent and conflict-of-interest-free individuals in the board of directors and board committees; having internal watchdogs (whistleblowers or oversight players) at SOEs; and improving transparency and reporting on governance.