BLSA CEO’s weekly – 29 June

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The ordeal of ratings downgrades continues. Last week it was the turn of our two leading state-owned financial institutions, the Industrial Development Corporation and the Development Bank of Southern Africa. They were both downgraded by Moody’s, with a negative outlook. As we gear up to drive an economic recovery, the downgrades make it more difficult for the two institutions to fund investment to support the economy.

The ratings agency has determined that the government may not always be able to support the IDC and DBSA if they need it. Moody’s pointed to government’s failure to support SA Airways and the Land Bank prior to its default on debt obligations as signs of government’s waning ability to fund its institutions. There is, of course, a difference between need and ability. We should never have SOEs that need bailouts in the first place. But it is an even more parlous state affairs to not be able to bail them out when they do need it.

This is an important line to have crossed. Many of us have loudly objected to the waste of resources by dysfunctional, corrupt and incompetently led SOEs that have compelled government to pour more money into them. But now there is genuinely little chance of pouring more money in, not because SOEs are suddenly well run and delivering, but because government simply cannot find any more money. This is what Moody’s has signalled – investors in the IDC and DBSA now face heightened risk because there is no longer an implicit expectation that government will bail them out if required as a last resort.

In part, this situation was avoidable, until even recently. The Land Bank default in April is widely seen as an unnecessary blunder. It was the only state-owned enterprise to be mentioned in finance minister Tito Mboweni’s supplementary budget last week, when he announced R3bn of new government equity funding for it. That could have been done prior to its default, which would have avoided undermining the investor confidence that government is a good custodian of its financial SOEs, even while their faith in other SOEs has long been lost.

But we must now see the SOE crisis for what it is. This is now the end of the road, when the money spigot runs dry. The way we deal with our SOEs has to change. The choices now are not between success and bailout, but between success and liquidation. The cost of failure is not just another taxpayer-funded rescue and turnaround plan. It is collapsed companies, services and jobs.

As BLSA, we wrote an open letter to the new SOE Council members last week, sharing our thoughts on the enormity of their challenge. Subsequently, I spoke to one of the members of the Council and further offered our support as BLSA. The Council has already made a very discerning high-level analysis of what underpins the problems of many of the SOEs and has received offers of support from many South Africans who are ready to roll up their sleeves and assist. I left the conversation feeling encouraged and hopeful about the work of the Council.

We laugh at the old cliché, “We said it before, but this time we mean it.” We laugh because anyone saying it has already lost credibility. We’ve heard so often about SOEs that the best response is to smile and nod. But a crisis is looming of a quite different nature than ever before. This time, we have to mean it and all of us will need to work together to put our SOEs on a sustainable footing that will enable them to support the recovery of our economy.

I also gained some confidence in the potential for SOE turnarounds last week when Eskom CEO Andre de Ruyter addressed business leaders in a webinar that BLSA organised. De Ruyter was frank and detailed about the challenges facing Eskom and his efforts so far to deal with them. The good news is that Eskom has used the Covid-19 lockdown period to get ahead of its maintenance schedule (despite challenges like not being able to fly in outside engineers for some specialist tasks). As a result, De Ruyter says the country could see the end of load shedding by August next year. He is working hard to change the culture of Eskom while preparing it for the restructuring of the energy sector in line with the Integrated Resource Plan. I had great feedback from business leaders after the call saying he had inspired confidence in them that he will succeed in fixing and modernising Eskom.

Finance minister Tito Mboweni seems to realise the state of our finances is an existential threat. His supplementary budget last Wednesday rested on the key question of whether we continue our decline or start a process of renewal. His warning was clear – if we continue as we have, we will end up in a debt crisis that will see us lose our sovereignty to our lenders. But we were disappointed in the solutions on offer to avoid this fate. We now need the president, along with cabinet as a whole, to outline and deliver a comprehensive economic reform package that will spark confidence in the private sector to start investing. Read BLSA’s full reaction here.

South Africa runs the real risk of a sovereign debt crisis in about three years, which will feed into all our major corporations and our banking sector, I wrote in my Business Report column. Furthermore, businesses can no longer rely on simply looking for expansion opportunities in other geographies as in years past. Across the globe, #Covid19 has posed some tough questions about everything from inequality to social contracts. As such we also have to look at our social compact and ensure we are all aligned in getting the economy growing again.  We need to understand that government, business and labour are all invested in a turnaround in our futures.

With the world of work so jarringly disrupted by the Covid-19 pandemic, businesses need to adapt to social distancing and a work-from-home culture. Policymaking around labour, too will have to adapt to the post-Covid normal. Tragically, our recent history has proved that the official policy on jobs has been more concentrated on keeping people in work than actually building an environment conducive to the creation of jobs. The public sector wage bill has risen sharply since the global financial crisis more because of the rate of increase in remuneration than the actual number of jobs. If we continue down the path of reliance on the state to create jobs, we are only likely to cement the country’s structural unemployment catastrophe, I wrote in Business Day.

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