Writing about the state owned enterprises feels like beating the same drum over and over, or singing the same tune. There are only so many ways to describe a pending disaster; the eminent Wall Street Journal has chosen the terms “a cliff’s edge“ and “it’s gluing sentiment to the floor.” Business leaders, ratings agencies, economists, analysts, foreign governments, traders, investors and opposition leaders are all giving the ANC government the same message: the public entities, Eskom, SAA et al are breaking the back of the economy and if something is not done urgently about it; it will drag the country further into a rabbit hole and people will suffer. President Cyril Ramaphosa became the President of the ANC in December 2017. At the time the business community sighed with relief; South Africa was in better hands. But the belief in Ramaphosa is starting to waver, with more and more people asking whether he has the guts and ability to drag the country back to better times. – Linda van Tilburg
South Africa’s scandal-hit state firms put economy on ‘Cliff’s Edge’
By Alexandra Wexler
(The Wall Street Journal) – JOHANNESBURG – Growing problems at South Africa’s state-owned enterprises are pushing major companies toward bankruptcy and subjecting the continent’s most developed economy to rolling blackouts that are choking growth.
Earlier in December, flagship carrier South African Airways narrowly avoided collapse after the government loaned it R2bn ($137m) and ordered a restructuring. The cash injection came as South Africans watch eye-popping testimony from a national commission where witnesses allege corruption at the airline and other state-owned companies under former President Jacob Zuma.
Also read: There may still be some hope for SAA
The airline’s plight reflects the broader malaise of the country’s mismanaged and heavily indebted state-owned companies that new President Cyril Ramaphosa has pledged to fix. His government also recently provided a R59bn bailout of state-owned power utility Eskom. The inability of the company to generate sufficient power has left parts of major cities like Johannesburg and Cape Town without electricity for up to 8 hours a day. The government also placed the state-owned Passenger Rail Agency of South Africa under administration, a form of bankruptcy protection.
The escalating crisis and its impact on the public finances is a threat to South Africa’s economy, which contracted 0.6% in the third quarter. The country has but one remaining investment-grade credit rating. Eskom’s debt – about R450bn – represents almost 9% of South Africa’s gross domestic product.
“Now we’re on the cliff’s edge,” said Peter Attard Montalto, head of capital markets research at Intellidex, a South African research firm. “It’s really gluing sentiment to the floor.”
After Mr. Ramaphosa last year succeeded Mr. Zuma – who denies wrongdoing – investors backed efforts by the former protégé of Nelson Mandela to repair the damage caused by corruption that came to be known as “state capture.” Mr. Ramaphosa has struggled to boost growth or significantly reduce an unemployment rate of 27%, two promises at the centre of his election campaign. He said in December that saving the state-owned companies will require “tough decisions.”
But as the scale of the damage has emerged, the patience of investors – and South African voters – appears to be thinning.
Tshepo Lethea, a 29-year-old civil engineer in the Soweto suburb of Johannesburg, said power cuts are weighing on his business and testing his family’s long support for the ruling African National Congress party, or ANC.
“I run a small business, and I can tell you that the effects on the economy are real. I am severely affected,” Mr. Lethea said. “In the ANC, there are multiple factions and stakeholders who have competing interests, and this is what is slowing processes down overall. People don’t want to work together.”
Earlier in December, an elite police unit known as the Hawks arrested two former Eskom senior managers for fraud, corruption and money laundering amounting to R745m.
For the first time, Eskom also implemented “Stage 6” power cuts in December – meant to prevent a total collapse of the national electricity grid. Intellidex estimates that those higher cuts are costing the South African economy up to R4.2bn per day.
The electricity outages are also restricting production at some of South Africa’s largest gold and platinum miners, including Harmony Gold, Sibanye-Stillwater and Impala Platinum, with some shifts in underground mines cancelled. Since South Africa is the world’s top platinum producer and supplies about 40% of global palladium, the power cuts helped send futures of the metals 3.3% and 2.5% higher one recent week.
The mining slowdown has spilled over into other sectors, setting back transportation and manufacturing. The power cuts have also hurt cellular connectivity.
“Eskom remains the biggest risk facing the economy… the ability to make a dent on unemployment and to stop the economy from going into a recession, will become a mammoth task,” Alan Mukoki, chief executive of the South African Chamber of Commerce and Industry, said in a note.
Explosive testimonies at the Zondo Commission, a public inquiry established by Mr. Ramaphosa to investigate graft allegations at state companies, are shedding light on the causes of the crisis. Phumeza Nhantsi, the former South African Airways chief financial officer, told the commission that she only later understood that she was used as “a vehicle for people to enrich themselves” while the company was run by Dudu Myeni, the airline’s chairwoman and a Zuma ally, from the end of 2012 through 2017.
“There were people who were suspended because they said no to decisions and instructions,” Ms. Nhantsi testified. “As the pressure was mounting, I even one day told my husband that I don’t know what I got myself into when I joined SAA. You are given an instruction to do this and certain things are not lawful.”
Former senior executives at the airline interviewed by The Wall Street Journal described an atmosphere of incompetence and paranoia on the carrier’s board. Company leadership banned the use of computers and cell phones, and at one point, even note-taking during meetings, for fear of being recorded, the former executives said.
Ms. Myeni’s lawyer didn’t return requests for comment. She has previously denied wrongdoing.
Darias Jonker, Southern Africa director at political-risk consulting firm Eurasia Group, said state-owned companies are reaching a “tipping point.”
“The financial losses, governance failures and operational deficiencies have accumulated to such an extent that they are no longer financially viable businesses,” he said. “SAA is the foremost example, but Eskom could follow if a sustainable debt restructuring proposal is not found.”
– Write to Alexandra Wexler at [email protected]