State-owned enterprises have lurched from
crisis to crisis in recent years. Anyone who doubted the damage their
instability could do to the economy should take a look at the report
Standard & Poor’s (S&P) released on Friday.
S&P already had SA’s sovereign credit rating at the lowest notch on the investment grade table. Now it has put the rating on "negative watch", an indication that it is looking to downgrade into subinvestment grade or "junk" bond territory within the next year or two.
Problems at state-owned enterprises are one of the main reasons that might cause S&P to do that. Its comments note the need for an urgent review of the role, ownership structure and operations of the state-owned enterprises.
And unlike the rather inane, albeit lengthy review of state entities chaired by Riah Phiyega, that reported back in 2013, the new one needs to take a frank, no-holds-barred look at what ails the more troubled enterprises and whether or not they should be retained in their current form. More important, the recommendations need to be substantial and the government must act on them.
Fitch Ratings downgraded SA. Both it and S&P cited South Africa’s high level of government debt and noted the "contingent liabilities" on the government’s balance sheet. The contingent liabilities reflect the guarantees the government has issued to support borrowing by financially troubled entities. Strictly speaking, they are not counted as part of the government’s debt. But if those enterprises went under, and the guarantees were called on by the lenders, they would have to be included on the government’s balance sheet as debt. It would not look good.
Fitch noted that in addition to the government debt-to-GDP ratio, which it tips to rise to 52.4% in 2017, the government has contingent liabilities equivalent to 11.5% of GDP, mainly related to Eskom. But the risk associated with funding of state companies was less of an issue for Fitch than S&P.
S&P said the government faced risks from "public enterprises with weak balance sheets". They include Eskom, which has a R350bn guarantee facility and has been promised an equity injection of R23bn to add to the R60bn it has received, Sanral and South African Airways (SAA), which together have drawn R40bn of the R50bn in guarantees the government has provided. SAA has asked for at least R5bn more.
The agency has issued a clear warning: it could lower SA’s ratings "if state-owned enterprises require higher government support than we currently expect".
That is a call for the government to face up to the need for real reform of state entities. It cannot tinker at the edges. There is no room for the kind of procrastinating we’ve seen with SAA. The government needs to stop the abuses and put in place boards and management teams that can run the enterprises effectively and efficiently. And there must be no political interference.
There needs to be clarity about who is in charge — the Department of Public Enterprises; the Treasury or line departments.
Second, the government has to decide whether it really needs to own 100% of key entities — and justify this if it does. While full privatisation may not be the answer, there are compelling arguments to look at disposing nonstrategic assets or divisions as well as those that can be run better by private sector operators.
Crucially, there is no reason that the private sector rather than the cash-strapped public sector pours new investment in public infrastructure. There is plenty of private funding available for good, bankable projects and South Africa needs to take advantage of that — as it has done with the independent producers of renewable energy.
The bottom line is that the government must act urgently to find a way of reducing its risk and protecting its vulnerable balance sheet.
S&P already had SA’s sovereign credit rating at the lowest notch on the investment grade table. Now it has put the rating on "negative watch", an indication that it is looking to downgrade into subinvestment grade or "junk" bond territory within the next year or two.
Problems at state-owned enterprises are one of the main reasons that might cause S&P to do that. Its comments note the need for an urgent review of the role, ownership structure and operations of the state-owned enterprises.
And unlike the rather inane, albeit lengthy review of state entities chaired by Riah Phiyega, that reported back in 2013, the new one needs to take a frank, no-holds-barred look at what ails the more troubled enterprises and whether or not they should be retained in their current form. More important, the recommendations need to be substantial and the government must act on them.
Fitch Ratings downgraded SA. Both it and S&P cited South Africa’s high level of government debt and noted the "contingent liabilities" on the government’s balance sheet. The contingent liabilities reflect the guarantees the government has issued to support borrowing by financially troubled entities. Strictly speaking, they are not counted as part of the government’s debt. But if those enterprises went under, and the guarantees were called on by the lenders, they would have to be included on the government’s balance sheet as debt. It would not look good.
Fitch noted that in addition to the government debt-to-GDP ratio, which it tips to rise to 52.4% in 2017, the government has contingent liabilities equivalent to 11.5% of GDP, mainly related to Eskom. But the risk associated with funding of state companies was less of an issue for Fitch than S&P.
S&P said the government faced risks from "public enterprises with weak balance sheets". They include Eskom, which has a R350bn guarantee facility and has been promised an equity injection of R23bn to add to the R60bn it has received, Sanral and South African Airways (SAA), which together have drawn R40bn of the R50bn in guarantees the government has provided. SAA has asked for at least R5bn more.
The agency has issued a clear warning: it could lower SA’s ratings "if state-owned enterprises require higher government support than we currently expect".
That is a call for the government to face up to the need for real reform of state entities. It cannot tinker at the edges. There is no room for the kind of procrastinating we’ve seen with SAA. The government needs to stop the abuses and put in place boards and management teams that can run the enterprises effectively and efficiently. And there must be no political interference.
There needs to be clarity about who is in charge — the Department of Public Enterprises; the Treasury or line departments.
Second, the government has to decide whether it really needs to own 100% of key entities — and justify this if it does. While full privatisation may not be the answer, there are compelling arguments to look at disposing nonstrategic assets or divisions as well as those that can be run better by private sector operators.
Crucially, there is no reason that the private sector rather than the cash-strapped public sector pours new investment in public infrastructure. There is plenty of private funding available for good, bankable projects and South Africa needs to take advantage of that — as it has done with the independent producers of renewable energy.
The bottom line is that the government must act urgently to find a way of reducing its risk and protecting its vulnerable balance sheet.
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