South Africa could face a “fiscal crisis” if the risks associated with state-owned enterprises materialise, the National Treasury’s 2018 budget review released today indicates.
This situation forms part of three alternative scenarios that the Treasury has mapped out in the Budget Review.
A failure of one or more local state-owned enterprises would prompt another credit ratings downgrade.
“The cost of borrowing increases by an average of 2.4 percentage points over the medium term. GDP [gross domestic product] growth contracts by 3.1% and 0.3% in 2018 and 2019, respectively, before recovering to 1.1% by 2020,” the budget review said.
In contrast, the Treasury is forecasting the local economy to expand by 1.5% this year, 1.8% in 2019 and 2.1% in 2020.
A major risk among the state-owned enterprises is Eskom which needs another R15 billion in funds before the end of March to avoid defaulting on debt that is becoming due.
“Eskom’s financial position is now a major risk to the economy and the public finances,” the budget review said.
Eskom used an additional R18 billion of its state guarantees and is expected to use R17.9 billion annually over the medium term, the budget review added.
The power utility has drawn down almost R221 billion of its R350 billion in state guarantees.
In another scenario, Moody’s Investor Service downgrades the government’s local-currency debt to “junk status”.
Moody’s is the last major credit rating agency to have kept the government credit rating at investment grade while Fitch Ratings and S&P Global Ratings both downgraded the country to “junk status” in April last year after former president Jacob Zuma axed Pravin Gordhan as finance minister and replaced him with Malusi Gigaba.
Late last year, Moody’s placed the country on review for a downgrade and that review will be completed some time after the agency has examined today’s budget speech.
“The risk premium – a measure of the extra return required by global buyers of South African bonds – increases by 100 basis points, or one percentage point, before returning to the baseline average in 2020.
"The impact on growth is largely reflected through higher borrowing costs, and lower investment and consumption. Growth slows to 0.7% in 2018, 1.3% in 2019 and 2% in 2020,” the budget review said.
In the third scenario Treasury assumes that the increase in business confidence evident at the beginning of 2018 is maintained, global growth improves by an annual average of 0.5 percentage points, the risk premium is on average 50 basis points lower and bond yields decline by an average of 70 basis points.
“GDP growth accelerates to 2.1% in 2018, 2.9% in 2019 and 3.2% by 2020, as higher income growth promotes stronger consumption and investment demand.
Robust structural reforms, including changes to the business models of state owned companies, bolster confidence and investment,” the Budget Review said.