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SOEs leave SA in dark debt till 2024

Sanlam Intelligence
| Investment Landscape

By Arthur Kamp, economist at Sanlam Investments

The core message from Budget 2019 is that non-performing state-owned companies have become such a drag on the fiscus that it is difficult to place South Africa’s government finances on a sustainable path. This situation is compounded by an underperforming economy, which necessitates continued tax increases. New revenue raising measures amount to R15 billion in 2019/20, mainly by not compensating for bracket creep, which effectively raises personal income tax.

The Treasury is directly addressing one of the main expenditure pressure points by cutting the national and provincial wage bill by R27 billion over the next three years. Additional expenditure cuts imply a total cut in spending of R50.3 billion over the medium term. However, R23 billion is to be injected into Eskom per year. As a result, the expenditure ceiling lifts R16 billion over the medium term.

Disappointingly, there is material fiscal slippage relative to the Budget initially read in February 2018. A Main Budget deficit of -4.4% of GDP is projected for 2018/19, compared with the initial estimate of -3.8% of GDP. The deficit increases to -4.7% of GDP in 2019/20. This compares with a deficit of -3.8% of GDP projected in February last year. Thereafter the deficit declines a little, but remains wide at -4.55% of GDP in 2020/21 and -4.3% of GDP in 2021/22.

Worryingly, the Main Budget primary deficit (revenue less non-interest spending) increases to -1.0% of GDP in 2019/20 from -0.8% in 2018/19 and remains in deficit over the medium term Accordingly, the gross loan debt continues to increase and only stabilises in 2023/24 at a projected level of close to 60% of GDP.

The debt level in itself is not especially high relative to GDP. However, given persistent sovereign debt rating downgrades the real interest rate government pays on new debt is high relative to GDP. Hence, in the absence of a substantial improvement in the primary budget balance, the debt level can only be stabilised over time should the real interest rate on debt decline relative to the real GDP growth rate. The clearest path to this outcome would be to improve South Africa’s sovereign debt ratings or to lift real GDP growth. The former is hardly likely under current conditions, while the latter is difficult given high real interest rates and a situation in which the government is absorbing a large share of available savings to fund itself.

It should be noted that the support for state-owned companies is (almost) deficit neutral. But, the point is this support is preventing expenditure saving measures elsewhere from lowering the budget deficit and constraining the level of borrowing. The build-up in off-balance sheet contingent liabilities and the accompanying deterioration in the public sector’s balance sheet are now preventing the National Treasury from sticking to its fiscal consolidation path.

It must be noted there is a lot that’s good in Budget 2019, including the determined effort to boost capital expenditure relative to consumption expenditure and the firm stance on the need to improve the operational and financial performance of state-owned companies. Indeed, Minister Mboweni indicated the time is approaching when hard decisions need to be taken, including whether or not the central government should issue guarantees for the operational expenditure of state-owned companies, as well as consideration of equity partners where necessary.

Overall, the Treasury’s intent is to stabilise the debt ratio and return South Africa’s government finances to a sustainable path. But, the track record of recent years is not good and raises questions over South Africa’s fiscal consolidation path

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