Uncertain steps to restructure SOCs
Heinrich Krogram and Azwimpheleli Langalanga
Democratic South Africa now has its 6th parliament. The voting public gave the governing ANC another outright majority leading to a five-year term. The governing party’s margin has albeit been reduced from the last elections signalling declining popularity for the ANC. There is an expectation that the ANC should use this period to address corruption, the state’s contingent liabilities, fix the institutions, and overcome structural challenges in the economy. Solving these problems will require bold and decisive action on the part of the government.
The country entered the new year with fading optimism. This was compounded by revelations about the extent of corruption at the various commissions of inquiry. There has been continued uncertainty on critical economic policies. Such inconsistency is fuelled by electioneering and contradictory messaging. Extended power cuts in February and March accompanied by news that the state-owned company, Eskom, will potentially need another bailout in months to come made matters worse.
Initial high-frequency data indicated that the economy is likely to suffer a slight decline, but the expectation was that South Africa will regain the lost ground in the next three months. However, the recent release of the dismal first-quarter GDP figures makes a good second quarter recovery less likely. Failing to grow the economy by more than 2%, which a low bar for an emerging economy like South Africa, is not a train smash as adjustments can be made. A contraction of 3.2% requires some tactical policy adjustments and immediate damage control.
Several policy options have been put forward on fixing SOCs. It is likely, though that the bailouts will be required before any constructive policy implementation can be put to the test. A SOC bailout in this situation means that the state would need to borrow money to cover the gap in the fiscus. If there is a sovereign downgrade, this might mean mounting cost of debt.
Borrowing might be an inevitability since the South African government cannot fund all its expenditure via tax receipts. The government often must borrow money to cover outstanding budgetary expenses, usually in the form of government bonds. The efficacy of issuing bonds relies on the perception of the country being able to meet its debt obligations and comparative yield. This, partially, is why the government wants to keep Moody’s, S&P and Fitch in a ‘good mood’ as they signal to markets how risky, among other things, SA bonds are; with economic growth (prospects) being one of the indicators considered in their assessments. Policy indecision will dampen the mood of credit rating agencies. The indeterminacy within the government party over economic policy direction is damaging to investor perception.
Of crucial importance are recent developments in the economy. The rating agencies would want to understand why growth levels are depressed and what government intends to do about this. For this reason, damage control post Q1 GDP announcement from the government was a critical make or break moment. Unfortunately, what we got was more mixed messaging from the governing party, and no real response from the government. Announcements made by the ANC (or increasingly by individual members) should be taken with a bit of salt as the party’s policies do not always translate into government policy. Not to mention that the two are often conflated. There seems to be a strong emphasis, though, that the ANC in Luthuli House should set the tone on policy. Further, some of the ministers who are on the Left and who trace their roots from the trade unions may push for expansionary policy interventions in a climate when the fiscal resources are constrained. Mixed rhetoric and policy messages could likely bubble from within government, with factions in Luthuli House reinforcing this image of a Tower of Babel.
With regards to how the government intends to address the country’s SOCs post-bailout, key questions remain. For example, what are various models and options should the government consider for restructuring SOCs? What are the likely socio-economic impacts of the various restructuring options and how to mitigate their negative effects, especially on employees? How to address the deeper financial crises in the worst affected SOCs? Also, worth highlighting is a leadership and governance challenges within the SOCs sector. Eskom, SAA and Denel recently lost their CEOs through resignations, forced or otherwise. Leadership and governance will be the main challenge in government’s quest to restructure these entities.
Further, the government will have to contend with the labour unions. Unions are opposed to any restructuring that might lead to job losses. Besides unions, the government will face opposition from vested interests who have been using SOCs as cash cows during the Zuma administration. Thus far, it can be argued, there are no concrete plans on what government intends to do with underperforming SOCs. Yet a bold roadmap is required. The longer government tarries the more damage is inflicted on the economy.