Defend Truth


24 billion reasons why government needs to worry about its debt


Nazmeera Moola is Head of SA Investments at Ninety One.

The ‘extra interest’ on government’s debt is rising rapidly and astronomically, caused, in large measure, by its bailouts of Eskom and SAA. That’s the bad news. The good news is that there was a glimmer of hope this week.

R13.4-billion. That is the extra interest costs the government is paying solely due to the rising riskiness of government debt. Without action, that number for extra interest is scheduled to rise to R24-billion next year.

Let’s be clear: this is not the interest cost. That number will be close to R210-billion next year. This extra interest is also not directly due to the larger amount of debt the government has had to issue. This is solely due to the higher interest rate South Africa is being charged because it cannot get the country’s finances under control.

The good news is that in the last week there has been some progress in dealing with the problematic state-owned enterprises. South African Airways is holding the line on its current wage dispute with unions. This resulted in flight cancellations – and a fair bit of acrimonious language from the unions.

However, unlike the collapse to union demands we saw during last year’s Eskom wage negotiations, so far management and the owner (namely the government) are standing tough. SAA has had R57-billion in bailouts since 2000. When so many large numbers are thrown around, it is easy to become immune. But let’s break that into something tangible. South Africa plans to spend R263-billion on basic education in the year ended March 2020. The extra interest bill in the same year will be almost 10% of that amount. SAA’s bailouts over 10 years amount to almost 20% of next year’s education spend. These are not small numbers: almost 12 million learners are educated on this budget.

More importantly than the tentative progress at SAA, there has also been tangible progress at Eskom. After several months with the chairperson acting as CEO, the state-owned behemoth has appointed a new CEO. Andre de Ruyter is currently CEO of embattled packaging company Nampak. However, he comes with 20 years of industrial experience from Sasol, which includes successfully turning around key entities.

While there is some disappointment that De Ruyter has been appointed instead of the mooted Andy Calitz who comes with previous Eskom experience and an impressive record at Shell, this is a positive step forward for the company.

The key for De Ruyter is to make sure he has the right team around him. The first step should be to shore up the operations with an ExCo member that takes a hands-on approach to the power stations. Next step would be procurement, where Eskom desperately needs a long-term affordable coal procurement plan. Perhaps Mick Davies is available for a temporary appointment?

Thereafter, Eskom needs to be broken up into generation, transmission and distribution. While there may not be immediate short-term benefits to the break-up, in the long term it ensures access to the grid by new electricity suppliers. Ultimately, this move will shrink the relative size of Eskom in the South African economy – removing the threat of “too big to fail” that allowed Eskom executives to make feckless decisions.

If the government can resist the urge to cave to union demands at SAA, it may be possible to find a strategic partner for the airline. If that happens, then the burden of regular recapitalisation of SAA can be lifted from the government. After all, why is the government subsidising middle-class holidaymakers and business people at the expense of education?

Imagine if we get to February 2020 and we have a strategic partner to run SAA coupled with concrete progress on the Eskom break-up. That would go a long way to reducing South Africa’s fiscal risks, thus reducing the risk premium investors require to buy South African government debt. That would help narrow that spread between South Africa and other emerging market debt. That could begin to reduce the extra interest paid from R24-billion to R15-billion at the optimistic end. We could do a lot with R9-billion saved on interest.

To achieve that, we also need progress on the government wage bill – progress that reduces the growth in the wage bill next year.

Last week, I thought it was impossible to expect sufficient progress for a narrower risk premium. This week, there are some tentative positive steps. We just need a few more. If this were 2015, the Ramaphosa government would have several years to take them. Unfortunately, the damage done since then is so large that they only have a few months. But the last week suggests it may be possible. BM


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