State entities' debts push SA to the edge

The more than R450-billion the government has advanced as guarantees for ailing state-owned entities is the biggest credit-ratings risk South Africa faces, lifting the country's debt-to-GDP ratio by nearly 20%.

In response to a parliamentary question by the DA's David Maynier, Finance Minister Pravin Gordhan said that, by June this year, the government had provided R468-billion in guarantees to state-owned entities.

The entities use the guarantees to cover loans obtained on international markets. If they fail to repay, the government has to.

So far R265-billion has been borrowed against government guarantees but the amount could rise.

Eskom has been the biggest recipient of guarantees, totalling R350-billion. It has borrowed R179-billion against this amount.

SA Airways had by June received more than R14-billion in guarantees and had borrowed almost the same amount.

The airline got another guarantee, of R5-billion, in September, not included in Gordhan's figures.

Efficient Group chief economist Dawie Roodt said many SOEs were borrowing not only to finance capital projects but to pay current accounts such as salaries, and this was "unsustainable".

He said the state explicitly guaranteed some of the SOE debt through bailouts and implicitly because it was generally believed that it was unlikely to allow a state-owned entity to go bankrupt.

"For example, last year the government converted R60-billion advanced to Eskom to equity in the company. But the government already owns 100% of Eskom, so how is it possible to own more than 100% of an entity?"

Chief economist at Econometrix Azar Jammine said one of the biggest risks in averting a downgrading of South Africa's sovereign debt rating was the state-owned entities.

"That's why you want them better run - when they start losing money, it increases public debt."

Roodt said that neither the Reserve Bank nor the Treasury definitions of debt took into account guarantees paid to SOEs. Including them in the calculation would increase the ratio of debt to GDP by about 20%.

Jammine agreed, quoting ratings agency Fitch's figures.

"The Fitch figures show that the contingent liabilities add about 18% to the ratio of public debt to GDP, so if you add that to the current ratio of 49% you're looking at 67% of GDP," he said.

In October, Gordhan raised concerns about the debt-to-GDP ratio.

Figures released by Statistics SA yesterday show disappointing GDP growth of a meagre 0.2% in the third quarter.

"The only conclusion you can draw from a 0.2% growth rate is that there is no momentum and it seems to suggest there is very little underlying confidence," said Nicky Weimar, an economist at Nedbank (See full story on Page 8).

Jammine said increased government guarantees could adversely affect SOEs' ability to borrow non-government money. In the wake of the further R5-billion guarantee advanced to SAA in September, private lenders Futuregrowth and Abax Investments said they would no longer fund SOEs.

"It's a risk. Last month we saw S&P Global downgrade Eskom's credit rating, which is serious because when Eskom is unable to raise funds in the private sector it will turn to the government."

Gordhan said the state had billions more sunk in other contingent liabilities, including R7-billion for the African Bank bailout, a very low-risk R9-billion in public-private partnerships, and R200-billion for the Independent Power Producers' programme. Eskom is obliged to buy power from these producers over the next 20 years but if it is unable to do so the state would have to take over the payments. - Additional reporting by Bloomberg