Government warned to bring in private sector or pay more bailouts

Even after dipping into gold and forex reserves, the country’s fiscal outlook is not much brighter.

An economist has warned that government must bring in the private sector to help or pay more bailouts and even more serious: find the money for further bailouts for the country’s ailing state-owned entities.

South Africa will have to borrow a lot over the coming years and the country already faces higher debt redemptions over the medium term, at a time when interest rates are high and revenue growth weak, Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

“Treasury’s forecast revisions for revenue are too optimistic and its decision not to cut back on spending is regrettable, but not unexpected in an election year. In addition, South Africa’s tax base looks precarious, with just about three million taxpayers accounting for almost 90% of personal income tax.”

With nearly four times as many grant recipients (28 million in total, including roughly nine million Covid social relief of distress grant beneficiaries) as there are individual taxpayers in South Africa, government spending in general, as well as spending pressure associated with social support in particular, are expected to remain high over the coming years, Van der Linde says.

“Additional financial support to debt-laden state-owned enterprises (SOEs) will complicate matters further. Transnet fulfils a salient role in the economy and unless the private sector is roped in to help get the transport utility back on track, a future bailout is likely.”

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Government exhausted all the easy options

He warns that government has exhausted all the easy options, while the best ones, such as pro-business policy reform, increased private sector partnerships and fiscal consolidation, are politically sensitive. Further delays will impose costs on the economy and all South Africans.

South Africa’s fiscal ratios improved thanks to the R150 billion in Gold and Foreign Exchange Contingency Reserve Account (GFECRA) profits and after the Treasury raised its revenue forecasts.

However, Van der Linde says the fiscal outlook is not much brighter, with economic growth too weak and recurrent spending too high. “Government’s high borrowing requirement, owing to Eskom debt relief and increased debt redemptions, suggests precious little is left for Transnet. A future bailout ultimately hinges on more private sector involvement as the utility tries to turn things around.”

The 2024 Budget did not contain debt-relief measures for Transnet after Treasury granted the embattled utility a R47 billion guarantee last year, allowing Transnet’s lenders to roll over existing non-guaranteed debt for guaranteed debt.

At the end of 2023, the board of Transnet issued a turnaround plan consisting of a R47 billion equity injection and R61 billion in debt relief, similar in style to the Eskom support package, but much smaller.

Van der Linde says Transnet’s underperformance holds direct and tangible financial implications for the fiscus due to the negative impact on corporate earnings and the tax derived from exports. “While some might view this as the ‘tough love’ that Finance Minister Enoch Godongwana has been promising, it is entirely plausible that future financial support could still come, as Eskom’s debt arrangement is set to conclude in 2025/26.”

Transnet purportedly stated that the government guarantees it received in December are sufficient for the year ahead, allowing the utility to implement its recovery plan. Godongwana and President Cyril Ramaphosa have promised increased private sector partnerships, but the evidence so far shows the process has been painstakingly slow.

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Tapping GFECRA shows how thinly stretched government finances are

“In our view, the decision to tap the GFECRA is probably a once-off move and demonstrates how thinly stretched state finances are. What’s more, the decision to not grant Transnet a bailout is perhaps an indication of Treasury’s determination to have produced a palatable 2024 Budget, as a bailout is unaffordable and would have offset the GFECRA profits,” Van der Linde says.

The R250 billion bailout Eskom received in the 2023 Budget, spread over three years, has become a notable burden on government’s gross borrowing requirement, representing on average about 16% of the annual total.

He says with spending pressures high and government revenue underperforming, Treasury will need to borrow R321 billion during 2024/25 to fund the budget deficit. Moreover, South Africa’s debt redemption profile has become immoderate in recent years, standing at about R173 billion in 2024/25.

Over the medium term, he says, the country will have to manage substantially higher loan redemptions. Although the medium-term gross borrowing requirement will be R196 billion lower than projected in the 2023 MTBPS, mainly due to funds allocated from the GFECRA arrangement, government will still have to borrow more than in previous years.

Van der Linde says while the GFECRA will help to reduce domestic market financing requirements and limit growth of debt stock and debt-service costs, the 2024 Budget did not contain any meaningful expenditure cuts.

“In fact, R251.3 billion of additional spending was announced, mainly for the carry-through costs of the 2023/24 wage increase and wage bill pressures in labour-intensive departments of basic education, health and police.

“This move signals that government is not prepared to make difficult decisions which are necessary but unpopular, ahead of this year’s elections, negating the spending cuts touted during the 2023 MTBPS [Medium Term Budget Policy Statement].”

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No money left to spend on salient areas that fosters economic growth

In addition, the increasing weight of debt-services costs (21% of revenue and 17% of expenditure) over the near term will crowd out spending on salient areas that could have otherwise helped to foster faster economic growth and is another undue burden on government revenue, he says.

“Long-term borrowing in the domestic bond market is expected to average R327.8 billion over the medium term. South Africa’s yield curve has risen by 37 basis points since the 2023 Budget, reflecting investor concerns over the economic impact of persistent supply-side constraints, rising debt stock and socio-political risks.”

In the global context, South Africa has a generally steep yield curve. The cumulative 425 basis points rate hikes by the South African Reserve Bank (Sarb) during the current cycle lifted short-term interest rates while South Africa’s external position also became less favourable.

“What is more, South Africa’s elevated risk premium limits the extent to which the rand benefits from the positive interest rate differentials with advanced economies. Financing conditions should become more favourable once interest rate cuts start coming through.

“That said, the Sarb is unlikely to loosen monetary policy ahead of the US Fed, as upside risks to the domestic inflation outlook, capital flow volatility and a weak currency, among other factors, imply that the Sarb does not have the luxury to implement early rate cuts. We expect the Sarb will start cutting rates in the third quarter of 2024 and see the repo rate at 7.75% by the end of the year.”