SA is running out of time and money to ease a cash crunch at state-owned entities (SOEs), says the CEO for Nedbank, the latest business leader to express frustration at the pace of turnaround efforts at parastatals, including debt-laden Eskom.
Fixing SOEs, many of which are losing money and survive on cash injections from the government, is vital to President Cyril Ramaphosa’s drive to revive the economy and shore up investor confidence.
"Significantly more urgency is required to institute structural reforms to stem the economic and fiscal deterioration currently being experienced in the SA economy," Nedbank CEO Mike Brown said at the bank’s earnings results presentation in Johannesburg on Tuesday.
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Brown is the second prominent business leader this week to express dissatisfaction with the speed at which the government is moving in tackling the financial crises at SOEs.
His comments, as well as those of Sipho Pityana, president of business lobby group Business Unity SA, call into question Ramaphosa’s credentials as a political leader who will push unpopular reforms to put the economy on a robust growth path.
‘Critical juncture’
"It should be clear to everybody in our country that the economy right now is at a critical juncture, and going forward what is required is coherent economic policy, and that difficult decisions are made and not postponed, and urgent action on structural reform is required," Brown said.
One of the top priorities requiring urgent action is Eskom, which Brown referred to as the "very sick" elephant in the room. Eskom is operating at a hefty loss and is unable to pay interest on its more than R400bn borrowings raked up over the last 12 years.
The company, often cited as the biggest risk to SA’s remaining investment-grade sovereign rating, has reported a net loss after tax of R20.7bn for the 2019 financial year, a headache for finance minister Tito Mboweni at a time of fiscal constraints.
Brown, whose company reported a slight increase in half-year headline earnings per share in the face of tough competition and a weak economy, said that the recent bailout for Eskom should have come with conditions
"What we do not have is any certainty as to the long-term strategy, structure, leadership, operational capacity or financial forecasts for Eskom, and these need to be publicly set out as the conditions for the recent bailout that was funded by taxpayers."
The government had promised R69bn of support over the next three years, but expanded this by another R59bn in July, and R105bn of this will flow over the 2020/2021 period.
Eskom, which the IMF has said has a bloated workforce, is behind Fitch Ratings’s latest move to downgrade SA’s outlook to negative. The agency rates SA’s debt a notch below investment grade.
Moody’s Investors Service, whose forecasts in May pegged SA debt-to-GDP ratio at as much as 70% in the next few years, said on Tuesday that Eskom’s capital structure was not sustainable without continued government support.
Moody’s is the last of the big-three ratings agencies to have SA on investment grade.
Investec bond portfolio manager Malcolm Charles said the rand and the bond market have priced in Moody’s changing its outlook on SA’s credit rating from neutral to negative in November, which would be a sign the country is headed for an inevitable downgrade.
But Charles said the government could still avoid a downgrade if it quickly delivered a credible plan to restructure Eskom. A downgrade would result in SA being kicked off major bond indices.
In the meantime, investors in energy-intensive sectors such as mines, smelters and manufacturing were holding back, Brown said.
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