Fellow columnist Claire Bisseker made the point on Tuesday that the way the Treasury accounted for its support for Eskom in the recent budget hides the true extent of the damage to the fiscus (“Budgetary sleight-of-hand hides true fiscal picture”, February 28). I agree with her and would like to expand on the point she made.
The Treasury accounted for the transfer to the entity below the line, that is after reporting the fiscal deficit. According to officials, the transaction is seen as just a balance sheet transfer. The government records an asset by way of a loan to Eskom and a liability in the form of the debt it has incurred. New assets offset new liabilities and the net position is unchanged.
Obviously, this is a farce. The transfer of cash to Eskom is far from neutral. In fact, raising support for the entity from about R23bn to R83bn per annum on average amounts to a negative fiscal shock beyond any sustained by the state with respect to Eskom to date.
Assets are things from which you expect to get some value in future. While the accounting treatment from the Treasury and Eskom’s side recognises the allocation as a loan, this will be a deeply subordinated one, which will for all intents and purposes be equity. Also, I am quite sure no-one expects that the loan will be repaid or serviced. It is likely that at some point the loan will be converted to equity, as has happened before.
I was last in an accounting class more than 20 years ago, but I remember well the directive to recognise “substance over form” in accounting treatment. In this instance the books reflect “form over substance”. Officials can argue that this “loan” is an asset, but the economics argues otherwise. It looks like expenditure, and I wish it had been recognised as such. Then we would know that in effect there is no fiscal consolidation and no primary surplus, at least not yet.
The accounting treatment obscures the full implications of this transfer for fiscal policy. It is not true that the fact that the Treasury will give Eskom R250bn over three years will have no effect on fiscal policy. Eskom debt holders are getting money and all other priority areas of service delivery will not. This is a real and painful opportunity cost that will be borne by the rest of society.
The costs of this support are also reflected in debt metrics and the Treasury’s funding choices. We know the debt to GDP ratio is now expected to peak at 73.6% in the year ending March 2026, compared with an expected peak of 71.1% this year. What we have not discussed is a material deterioration in the risk of the country’s debt portfolio as the Treasury tries to meet the increased funding requirement. It also plans to drain cash reserves, including the cash that backs foreign exchange reserves, to meet this liability.
SA famously runs one of the longest-maturity fixed-interest and local currency debt portfolios in the world, and the longest in emerging markets. This has been one of the cornerstones of the positive credit assessments for the state. Going forward, maintaining this portfolio profile will become more difficult as long-dated, local currency debt financing becomes more expensive.
Additional funding for Eskom will be raised by issuing floating rate bonds and using the government’s cash reserves. Floating rate debt is cheaper but is riskier for the issuer. Cash is expensive to hold but acts as a buffer in the event of stress. Less cash, more nonfixed debt, means more fragility. There is a point beyond which the debt portfolio of the state becomes a problem in and of itself. We are not there yet, but that is the road we have taken.
In my post-medium term budget column in November I spoke about a negative doom loop bedevilling fiscal policy. This budget confirmed that the doom loop is in play. If these trends do not reverse, SA will end up with no fiscal space; unpredictable, reactive macroeconomic policy-making; and the boom-bust cycles characteristic of many emerging market economies.
• Lijane is a macro strategist.
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