Yet again, the taxpayer will bear the burden

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Trading your way out of a financial crisis requires an alignment of variables that no country can control, writes Khaya Sithole

About nine years ago, the Irish government mastered the art of moving from denialism to dealmaking.

In the aftermath of the global financial crisis in 2008, Ireland found itself unable to finance its way out of the impact of it.

As a result, it had to seek a bailout from the International Monetary Fund (IMF) and the EU.

Leading up to the official disclosure of the bailout, the Irish government denied that it would seek assistance.

Such denialism was based on the hope that, in spite of the dire state of the country’s finances, it would somehow trade its way out of it.

The reality, however, is that trading your way out of any financial crisis requires an alignment of multiple political and economic variables that no single country can fully control.

Problematically for the Irish, the bankers who had been instrumental in engineering the financial crisis were nowhere to be seen and the consequences of their actions had to be borne by the taxpayers.

German Chancellor Angela Merkel summarised this dilemma by saying: “We cannot keep on explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

In a similar vein, at the end of last year, the head of the IMF, Christine Lagarde, made a short visit to South Africa.

Given the dire state of the country’s public finances, the visit sparked anxiety among citizens, who started wondering whether the IMF might have to step in to fix the problem.

An IMF fix is regarded as an undesirable surrender of the state’s autonomy to manage its finances. Such a surrender enforces the type of fiscal discipline that politicians prefer to avoid.

And yet, with the crisis of state finances not being resolved, the prospect of seeking an intervention is gravitating towards reality.

The country’s problems are best illustrated by three state entities – Eskom, the SABC and SAA.

Each of them has common features – declining revenues, escalating costs and unsustainable balance sheets.

In a stagnant economy, no one expects such entities to trade their way out of the dark hole.

Eskom’s revenue is regulated and cannot be unilaterally increased to cover all the costs that it incurs.

The SABC’s reliance on licence revenue is a pipe dream in light of poor compliance and weak enforcement measures.

SAA, on the other hand, faces competitors that have found a way to adapt to the changing landscape of the airline business and keep finding ways to be profitable.

All three entities are, by all conventional measures, bankrupt. Their individual balance sheets mirror the classic case of “junk” status – high debt levels and poor-quality assets.

The assets are meant to drive production that leads to revenue.

And yet, in this case, we see assets that are poorly maintained or managed, hence their ability to be revenue drivers is compromised.

Eskom’s balance sheet is burdened with high levels of debt. Its ability to service that debt is compromised by a stagnant revenue base that will not improve in a low-growth economy.

The debt servicing costs drain cash from Eskom, which limits the ability to maintain the assets that are necessary to increase the revenue.

This trap has led the chairperson, Jabu Mabuza, to state that it would be useful for Eskom if the state absorbed R100 billion of its liabilities.

Finance Minister Tito Mboweni is averse to this idea and prefers that Eskom seek a financial lifeline in the capital markets.

Both are slightly off the mark.

Mabuza’s idea of a R100 billion shuffle comes in light of a debt burden that exceeds R400 billion.

Such a debt burden being reflected on one’s balance sheet simply makes the quality of that balance sheet junk in nature.

Consequently, any attempt to solicit funding from capital markets comes at significantly high interest costs.

To this end, the finance minister’s idea that Eskom ought to go out to the bond markets appears ill-conceived.

For a balance sheet that already suffers from poor ratings, there is no prospect of any funder providing lending terms that are favourable to Eskom.

Any terms provided will simply increase the debt servicing costs. Such costs can only be recovered from higher revenues.

But, due to the stagnant economic landscape, Eskom is not going to get an influx of new customers. Rather, it has to extract as much revenue as it can from its existing customer base through significantly high tariff increases.

In the absence of that, the possibility of Eskom defaulting on the debt it already has increases every day.

The problem with an Eskom default is that it isn’t only an Eskom problem but the entire country’s.

Any default will force all other state entities that owe funders – and there are a lot – to find cash to immediately pay.

Most of the entities have no cash, so the National Treasury would have to pay up. As the guarantor of Eskom’s debt, for example, the state already has exposure.

Its primary tool for assessing the country’s ability to fund itself – the debt-to-GDP ratio, is already higher than desirable.

And yet, if there’s a question of R100 billion being required to fix Eskom’s finances, the country would have to acknowledge that, if Eskom were to try to raise these funds on its own, it would come with the cost of unaffordable electricity prices.

Shuffling the liability to the national fiscus, on the other hand, comes with an increase in debt levels and a concomitant frown from ratings agencies.

But, given the fact that we cannot do without Eskom, the taxpayer bearing the cost of the problem is the most practical solution for us all.

Sithole is a chartered accountant, academic and analyst

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