R863 billion threat to South Africa’s finances

[Nat Quinn]

R863 billion threat to South Africa’s finances

The most significant risk facing South Africa’s public finances is the R863 billion in government guarantees on the debt of the country’s state-owned enterprises (SOEs).

National Treasury identified this as the primary risk facing public finances in South Africa as these liabilities total a significant 13.7% of annual GDP.

In its Financial Transparency Evaluation, the International Monetary Fund (IMF) emphasised the threat SOEs pose to the country’s finances.

The IMF praised the National Treasury for its transparency in reporting on the government’s finances.

However, it identified several weaknesses in the reporting of the government’s financial support of SOEs and the impact of this support on the national budget.

“South Africa’s 2023 budget reports are not in line with international guidance when reflecting the impact of bailouts as they show it as equity investments,” the report reads.

Since 2013, the government has bailed out state-run companies to the tune of R331 billion. This excludes Eskom’s massive R254 billion debt relief plan, which is currently underway.

The IMF said bailouts typically do not result in a return for the government in the same manner as other investments and would usually be considered a capital transfer, which is a deficit-impacting transaction.

“Therefore, it is important to ensure that the economic reality of the interventions is reflected accurately in fiscal reporting by following international guidance,” the IMF said.

Aside from the inadequate reporting on the impact of bailouts on the country’s budget, the IMF also highlighted the lack of discussion around the threat the R863 billion in contingent liabilities may have on South Africa’s finances.

Over the past decade, the government has increased financial support to SOEs through equity injections and loans.

This has had an impact on the volume of public debt and guarantees issued to cover this debt relief effort.

At this stage, the data shows that the state interventions have not been satisfactory, and measures to improve their finances to put SOEs on a sustainable, profitable path have proved insufficient.

The 2023 Budget Review revealed the government’s total guarantees exposure reached 9% of GDP during the 2022/23 financial year, with Eskom dominating the total guaranteed portfolio, taking up 60%.

This is a sharp increase in guarantees – from R225 billion (6% of annual GDP) in 2012/13 to R569 billion (9% of annual GDP) in 2021/22.

The IMF urged greater discussion to take place around the potential realisation of these government guarantees and contingent liabilities, particularly those relating to Eskom.

National Treasury’s rising guarantee exposure and the SOEs driving this growth are shown in the graph below.

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