Eskom’s slow political death, SA probably in recession and greylisting a fait accompli – Economist Dawie Roodt

South Africa’s stricken power utility will get debt relief to the tune of R254 billion over the next three years year, but economist Dawie Roodt says the indication by Finance Minister Enoch Godongwana and President Ramaphosa that municipalities debt may be written off and that the power utility should not implement Nersa increases meant that the Eskom problem would not be solved. Reacting to the Minister’s 2023 budget, Roodt said he did not think that the Minister’s economic growth estimate will be achievable; judging from the South African Reserve Bank’s leading indicator that predicts what economic growth is likely to look like over the next couple of quarters, South Africa is probably in a recession. He also believes the Minister had inside-info that South Africa will be greylisted. – Linda van Tilburg

Some extracts from the interview below

Finance Minister’s estimates on fiscal deficit and debt trajectory will not be achievable. 

The Minister of Finance probably did as well as he possibly can. But I’ve got one major issue with the minister’s estimates. He’s penciling in close to about 1% for this year and slightly stronger growth for years thereafter. I really doubt whether we’re going to see that. That’s the first major issue that I have, and that means that revenues are probably not going to materialise. The second one that I’m a bit concerned about is that we’ve seen quite a nice overrun in terms of revenue because of the last commodity cycle. The commodity cycle has cooled quite a lot, and I don’t think we can rely on much of that in this year and in the coming years. So, I’m quite concerned about the revenue side, and of course, he did not increase any taxes, which I am very happy about. But on the spending side, he’s trying to keep spending, especially non-interest spending; he is trying to keep that down in real terms, which is a good thing. But of course, there are a couple of things outstanding there. One, he’s budgeting for a 3.3% increase in the wage bill, and the trade unions are not going to like that. So, there’s a good possibility that we are going to see more spending eventually materialise. If you put all of this together, I’m afraid I don’t think these estimates on the fiscal deficit and his debt trajectory over the next couple of years will be achievable. And that, of course, is crucial when it comes to things like, for example, the downgrades and the like. 

We can’t fix the issues of Eskom if the culture of non-payment is not addressed

Something that I’m very concerned about is that the President and the minister alluded to that as well, and that the president previously said that this is not the right time for Eskom to implement this NERSA increase. The president also indicated some time ago that some of the debt of the local authorities, and he mentions Soweto should be written off. In his press briefing before the budget speech, the finance minister said that in some cases it is simply impossible for some of these local authorities to pay the debt that they owe to Eskom, which means that this debt will eventually have to be written off. This is a major issue. There’s no way that we can fix the problems at Eskom if we do not address this culture of non-payment. If those debts are written off, then what, are they going to suddenly start paying? I’m not so sure about that. So, these kinds of things, for example local authorities, this culture of non-payment in many instances, and the President suggesting that Eskom should not implement the NERSA increase. Those are all the things that point to one thing only, and that is that the Eskom problem will not be solved. Eskom will probably die a slow death, like what’s happened to South African Airways and what is currently happening to the post office. So, clearly politicians are not prepared to make the politically difficult decisions, especially now just before an election.

We are probably already in a recession

What came out yesterday is the South African Reserve Bank’s leading indicator that is basically telling us what economic growth is likely to look like over the next couple of quarters. According to the leading indicator of the South African Reserve Bank, we are probably already in a recession. So, the minister is expecting economic growth of close to 1%. I really doubt it. The South African Reserve Bank has estimated growth at 4.3 of a percent. So, I think economic growth of closer to about 0% can be expected this year or maybe even a recession, maybe even negative economic growth. I can’t foresee next year that it will be doing much better than that either. It has to do with the lack of electricity, obviously, but some other factors weigh on the South African economy as well. So, economic growth, I think that is the biggest single figure that I disagree with the Minister of Finance. I don’t think economic growth is going to materialise at 1% where he expects it to be.  

Rand takes a knock, bond market slightly stronger

The rand initially started off a little bit stronger and then during the speech the Rand weakened a little bit and I guess part of that has to do with some outstanding issues as far as Eskom is concerned. So, the rand weakened a little bit, but not too much. Currently it is trading at about R18.25 (to the dollar) where it was this morning. It’s back at this morning level again. Actually, the bond market appreciated a little bit. The bond market is actually a little bit stronger and I think that part of the reason for that is because the trajectory for the take-over of Eskom was probably a little bit lower than what the bond market initially expected. 

It seems to be a fait accompli that South Africa will move to the greylist

Listening to the Minister, I think he’s got some inside info. I think he has already been informed that South Africa is going to get greylisted. Of course, the immediate impact of this is not going to be so significant on the economy, but eventually it is going to weigh on economic growth. That’s another reason why I am negative and pessimistic about economic growth this year and next year as well. But the minister is throwing a lot of money to try to prevent, well, at least to try to get us back on the white-list again. It seems to be a fait accompli that we are going to get moved to the greylist. That is going to be quite painful and that’s part of the reason why the rand seems to be taking a bit of a knock now as well, because the greylisting in itself is likely to be quite negative to the exchange rate. 

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