25/02/20
The State of SOEs
In association with Nedbank.
For a number of years, Government has struggled to bring about fiscal consolidation without a material collapse in economic growth. While growth contractions have, largely, been contained at bearable levels, fiscal consolidation and smaller budget deficits have been hard to achieve and will prove highly costly over the long term. The reason for this is that excessive borrowing has driven up the debt stock, and the country now owes approximately 50% of GDP to its creditors, much of which is in hard currency. The remainder is largely owed to the country’s pension funds. Thus, the short-term funding needs have caused the country to incur long-term liabilities, without any material increase in productive capacity to show for it. At the same time, over the past five years, approximately N$325 billion has been allocated by the Ministry of Finance (despite the austerity drive).
Moreover, the end is not yet in sight. Because of lacklustre revenue collection and potential expenditure slippage (SOEs, state hospital collapse, wage bill adjustments, interest costs), there is a high probability of a larger-than forecast fiscal deficit. In this regard, however, a critical consideration and risk, is the funding of this deficit. For several years, large deficits have been funded by external issuance (during positive investment rating periods) and forced local asset purchases as a result of changes to pension fund regulations. However, this forced buying has largely come to an end now with only the government pension fund not yet compliant with the 45% local asset requirement, having received an extension on compliance to 2021. As a result, the marginal demand for public debt can be expected to fall, and thus challenges with regard to funding the deficit can once again be expected, particularly into the latter part of the year when Government runs its largest monthly deficits (due to front-loading revenue collection). Should deficit funding challenges recur, there is a chance of another liquidity squeeze and slowing of the velocity of circulation of money. At this point, the temptation to alleviate short term cashflow constraints by dipping into the hard currency sinking funds would be risky in the extreme, as the first hard currency debt comes due in under two years, and the country’s ability to roll this forward (from investment grade, strong growth outlook, little debt and a strong ZAR when issued) at a reasonable price, is yet to be seen.
Nearly 50% of total government debt matures in less than two years, including the first Eurobond (US$500 million). The managing of this process will likely be highly determining of the long-term future of the country.
The ongoing challenges faced by SOEs and the resultant financial demands on their shareholder will also be an important theme in 2020. Top amongst these is Air Namibia, which appears, once again, to be on the brink of collapse, and leaning heavily on its shareholder for support. However, while Air Namibia is the primary concern and well publicized, several other SOEs have taken a battering over recent years (as have similar private sector entities). Thus, like many private entities under pressure, we expect to see increased demands from these SOEs on the shareholder over the course of the year, despite forecasts that suggest the fiscus intends to reduce transfers. Moreover, it is increasingly apparent that reduced transfers from the fiscus over the past few years was not thanks to improved management and financial prudence in many SOEs, but rather achieved by encouraging SOEs to lend or transfer funds to one another, from the strong to weak balance sheets, thus increasing contagion risk and weakening many stronger balance sheets. The handling of the challenges of the SOEs runs the risk of derailing both growth and fiscal austerity. The only real, sustainable solution is absolute SOE reform.
