South Africa

South Africa’s Achilles heel

Further support for South Africa’s struggling state-owned enterprises is likely, specifically for Transnet and Eskom, which threatens to increase government debt even further.

In a recent note, coronation’s head of fixed interest, Nishan Maharaj, said that fiscal policy remains South Africa’s “Achilles heel”.

The country struggles with an elevated debt burden, and the government spends 22 cents of every rand collected by SARS on servicing this debt.

The government’s debt pile currently stands at around R5.46 trillion, built up by the state running budget deficits for the past 15 years. 

While running a budget deficit is not inherently bad, consistent deficits may result in a debt spiral where new debt is issued to cover existing debt. 

This is exactly what South Africa’s government has done since the 2007/08 financial year, when it last managed to balance the budget. 

In 2008/09, gross loan debt amounted to R627 billion, or 26% of GDP. 

However, 2024’s Medium-Term Budget Policy Statement (MTBPS) revealed that the government’s gross loan debt had reached R5.46 trillion, or 72.6% of GDP.

Finance Minister Enoch Godongwana said that debt-servicing costs will reach R388.9 billion in the current financial year – over R1 billion per day. 

“Put differently, this means for every one rand of revenue that the government raises this year, 22 cents of this is paid in debt-service costs,” Godongwana said. 

The minister said South Africa’s debt pile is unsustainable. He explained that debt-servicing costs have become the largest component of government spending – more than spending on healthcare, education and infrastructure.

To address this problem, the Finance Minister said the government has had to take “difficult steps” to reduce the budget deficit.

According to the minister, the current strategy will see the main budget deficit declining from 4.7% of GDP in 2024/25 to 3.4% in 2027/28, and the primary surplus will continue to grow. 

National Treasury believes the primary surplus will be sufficient for debt to stabilise at 75.5% in 2025/26.

Finance Minister Enoch Godongwana

However, Maharaj said the debt load will continue to increase towards 80% of GDP due to unaccounted-for items that continue to weigh on government expenditure. 

He highlighted 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.

Other unexpected items include municipal infrastructure upgrades, a larger wage bill, and high debt service costs. 

Expectations of a bailout for Transnet have been building for some time as the state-owned logistics company continues to struggle operationally and financially.

Transnet’s unaudited condensed consolidated financial results for the six months ended 30 September 2024 revealed that its revenue increased by 6% to R41.5 billion.

This aligns with the weighted average tariff increases in the rail, port, and pipeline businesses.

However, Transnet’s operating expenses increased even faster. It jumped 10.2% to R27.9 billion due to increased personnel, security, energy, maintenance, and material costs.

This resulted in a loss of R2.17 billion for the six-month period, up from a loss of R1.58 billion the previous year.

Bloomberg recently reported that the ANC plans to ask the National Treasury to consider a once-off debt-relief package for Transnet before February’s budget.

Deputy head of the African National Congress’s economic transformation committee, Zuko Godlimpi, told reporters that Transnet requires a similar package to the one given to Eskom in 2023.

Eskom chairman Mteto Nyati

The Treasury granted Eskom a R254 billion debt-relief package two years ago.

This bailout allowed the power utility to focus on addressing its operations struggles and make infrastructure interventions that enabled its recovery.

The utility achieved a higher electricity availability factor (EAF), which rose from just over 51% in January 2024 to over 63.6% in November 2024. 

However, while Eskom has made a remarkable operational turnaround, its financial performance continues to struggle due to the mounting municipal debt pile.

The utility has not been able to recoup around R95 billion in unpaid electricity bills from cities and towns across the country. 

This enormous drag on its financial health is threatening Eskom’s sustainability.

In the utility’s annual report, Eskom chairman Mteto Nyati warned that the municipal debt burden is hindering its plan to restructure and separate its distribution unit.

“The municipal debt challenge has the potential to jeopardize the distribution separation as well as threaten the financial viability and sustainability of the future distribution industry,” Nyati said.

Maharaj explained that the only ‘silver bullet’ that could address South Africa’s debt problem 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%,” he said. 

“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.” 

“As such, although the noise around the fiscal trajectory has quietened for now, the risks posed to the economy if implementation falters or growth fails to recover over the next two to three years are still very high.”

Maharaj illustrated the economic growth needed to stabilise South Africa’s debt in the graph below.

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