Local investors not willing to bank on SOEs - analyst

Johannesburg – Local investors aren’t willing to put their money behind state-owned enterprises amid political and regulatory uncertainty, said economist and strategist Nazmeera Moola.

Moola was speaking at the Discovery Financial Planning Summit held in Sandton on Monday. She shared on the impact of the Cabinet reshuffle on investor confidence.

When President Jacob Zuma replaced Pravin Gordhan as finance minister with former Home Affairs Minister Malusi Gigaba, ratings agencies Standard & Poor’s and Fitch Ratings downgraded South Africa's sovereign rating to junk over policy uncertainty. Fitch also downgraded the local debt rating. Moody’s, which has the sovereign rating two notches above junk, is expected to make an announcement soon.

Moola however highlighted that this uncertainty has not yet "shown up" in financial markets. It has become cheaper to buy local government debt, and there has been $12bn worth of foreign flows into government bonds. But this is due to a recovery in emerging markets as a whole, she said.

What is most concerning is that fixed investment in the private sector has contracted for the first time since 1994 due to internal shocks, said Moola.

The only two other instances when private investment contracted was due to global factors such as the Asian financial crisis in 1998 and the global financial crisis in 2008, she explained. The last two years of political and regulatory uncertainty have brought on the current contraction.

This means that state companies cannot borrow from local bond markets, said Moola. If companies like Transnet and Eskom were solely dependent on local bond markets alone for funding, they would have problems, she explained. “They would have to find alternative sources of finances.”

Since the Cabinet reshuffle Transnet has had three bond auctions and only managed to raise between R10m and R25m compared to historical figures of roughly R200m raised in bond auctions. “Eskom has not even tried to raise money from the local bond market in the past year … State owned companies can’t raise money in the local bond markets.”

This does not necessarily mean that there isn’t money available. Corporates such as MTN, Capitec and Barloworld sought to raise funds in the bond market for the first 10 days of May and their auctions were oversubscribed between two and three times, said Moola.

“Investors are not willing to invest in state-owned companies at this point in time,” she said.

Foreign investors don’t necessarily fund the state-owned company market. “State-owned companies are dependent on local investors for funding and local investors are not lending them money, that is the risk,” said Moola.

READ: PIC in the mix of options to fund loss-making SAA

Fin24 recently reported that Treasury may be considering using the Public Investment Corporation to bailout bankrupt SOEs, like South African Airways (SAA).

Newly formed South African Federation of Trade Unions (Saftu) raised concern over this. The National Union of Public Service and Allied Workers (Nupsaw) general secretary Success Mataitsane said that this intervention is only a “short-term solution”.  He explained that the Government Employees Pension Fund (GEPF), which is managed by the PIC, makes up a significant portion of public servants' wealth.

“Any irresponsible investment, like the one contemplated by the National Treasury, will threaten the sustainability of the fund,” he said.

A report by Moneyweb also revealed that the GEPF has funded the majority of Eskom’s debt. Saftu spokesperson Patrick Craven said this was a concern. “If however the PIC pays out GEPF funds to fill massive holes of debts at loss-making SOEs like Eskom and SAA, which are unable to raise loans on the market in the light of the government being downgraded by the ratings agencies, the GEPF will inevitably eventually become unsustainable,” said Craven.

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