SA’s fiscal policy remains the Achilles’ heel of the economy, with runaway municipal debt presenting a risk of further bailouts for Eskom, asset manager Coronation says.
Nishan Maharaj, head of fixed interest at Coronation, suggested in a note that the National Treasury would also find it difficult to follow through with its commitment in the medium-term budget policy statement not to bail out cash-strapped Transnet. He joins an emerging consensus in the investor community that the freight and logistics group needs shareholder support.
“The debt load will continue to increase towards 80% of GDP as acknowledged, but unaccounted-for items continue to weigh on government expenditure,” he said.
“These include further support for state-owned enterprises — Transnet more immediately and an increasing probability for Eskom if higher tariffs are not granted, or municipal debt is not repaid, municipal infrastructure upgrades, a larger wage bill, and high debt service costs.
“The only silver bullet is higher economic growth. Unfortunately, due to the slow pace of previous reform implementation, the magnitude of real economic growth that is required in order to stabilise and then reduce the debt load is around 3% to 4%. This is still some way off from our growth expectation of 2% to 2.3% by 2026, which is heavily dependent on the sustainability of the GNU.”
Asset manager Old Mutual Investment Group, has already said Transnet is in desperate need of recapitalising its infrastructure to the tune of R150bn and needs fiscal support to lighten its more R1bn-a-month interest burden.
In December 2023, Transnet received a R47bn guarantee from the Treasury to make it easier for the entity to raise capital from the market. This was a month after it had said no bailouts were on the cards for Transnet.
Its year-old appeal to the government, its sole shareholder, for the restructuring of more than R61bn in debt and an injection of R47bn in equity remains unresolved.
The ANC at the weekend called on the government to provide a similar package to the one given to Eskom. Two years ago the government approved a R254bn relief package for the power utility. Eskom has since turned around its operational performance and has kept the lights on for nearly a year.
However, its financial future is at risk from ballooning municipal debt. Eskom chair Mteto Nyati has warned that runaway municipal debt, which topped the R100bn mark, risks delaying the unbundling of the utility’s distribution unit, potentially putting into question the viability of the distribution arm.
Municipalities owe Eskom a staggering R109.4bn, more than an 18-fold jump in unpaid electricity bills since 2015 when they owed just less than R5bn.
Maharaj said though the noise around the fiscal trajectory had quietened for now, the risks posed to the economy if reform implementation faltered or growth failed to recover over the next two to three years were still very high.
He weighed in on the debate for SA to lower its inflation target, saying it might not necessarily achieve what people pushing for the policy shift, including SA Reserve Bank (Sarb) governor Lesetja Kganyago, want to achieve.
“One of the key arguments from the Sarb has been that the current inflation target has remained too high relative to the rest of the world. However, there are two key rebuttals that question the durability of the Sarb’s case. Firstly, although many emerging markets have lowered their inflation target over time to a target that is below our 4.5% target, they have failed to sustainably maintain their inflation at that level,” Maharaj said.
“Secondly, the Sarb has argued that our real policy rate needs to increase in line with the global real policy rate. However, as global inflation has remained high, ours has remained contained, narrowing the inflation differential significantly, thus reducing our need to track the global real policy rate higher.”
The formation of the government of national unity has been a boost to SA Inc, with the all bond index in 2024 returning 17% — the highest annual return the local bond market has delivered in more than a decade.
Gareth Bern, chief investment officer for fixed Income at M&G Investments, credited the performance of SA assets broadly to Operation Vulindlela, a joint initiative between the presidency and the National Treasury to accelerate reforms across key sectors within the economy.
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