As South Africa gears up to drive an economic recovery, Business Leadership South Africa (BLSA) CEO Busisiwe Mavuso has lamented the continuing downgrades of the country and some of its institutions, noting that these “make it more difficult” to fund investment to support the economy.
The Industrial Development Corporation (IDC) and Development Bank of Southern Africa (DBSA) were both recently downgraded by rating agency Moody’s, both with a negative outlook.
In her weekly newsletter, Mavuso notes that the ratings agency had determined that the government may not always be able to support the IDC and DBSA if needed, with Moody’s referring to government’s failure to support South African Airways (SAA) and the Land Bank prior to its default on debt obligations as “signs of the government’s waning ability to fund its institutions”.
However, Mavuso points out that there “is a difference between need and ability”, adding that South Africa “should never have State-owned entities (SOEs) that need bailouts in the first place”.
Though she adds that “it is an even more parlous state of affairs to not be able to bail them out when they do need it”, which she says is an important line to have crossed.
With many of the country’s citizens having loudly objected the waste of resources by “dysfunctional, corrupt and incompetently-led SOEs” that has compelled government to pour more money into them, Mavuso says there is now genuinely little chance of pouring more money into these SOEs, because “government simply cannot find any more money”.
This is what Moody’s has signalled, she adds, noting that 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.
Mavuso says this situation was, in part, avoidable until recently.
“The Land Bank default in April is widely seen as an unnecessary blunder. It was the only SOE to be mentioned by Finance Minister Tito Mboweni in his supplementary budget last week, when he announced R3-billion of new government equity funding for it,” she explains, adding that this 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 therein has been long lost.
For this reason, Mavuso says it is now high time the SOE crisis is solved, and that the way in which South Africa deals with its 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, but it is collapsed companies, services and jobs,” she states.
BLSA wrote an open letter to the new 10-person SOE Council members last week, sharing its thoughts on the enormity of their challenge.
Subsequently, Mavuso spoke to one of the council members and offered BLSA’s support.
In her open letter on June 29, she notes that 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”.
She says she “left the conversation feeling encouraged and hopeful about the work of the council” as the looming crisis is of a different nature than 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,” she concludes.