Wednesday’s budget was “all fine” on the fiscal side. The imperative was to hold the line broadly on strong spending pressures, which it did.
There are some question marks on revenue, but they hung over the medium-term budget policy statement too, and have not fully materialised yet. The corporate profitability hit coming from deeper load-shedding will perhaps only later reflect in the next fiscal year’s revenue numbers.
Due to the deft Eskom funding strategy announced in the budget, the weekly issuance of government bonds will remain flat despite a sharp ramp-up in the gross borrowing requirement. Instead, cash, foreign exchange, and in particular multilateral financing, as well as more T-bills, will be used.
Yet the markets did not quite react as expected to all this positivity. The fundamental problem remains of the shape of the yield curve being so steep (historically, domestically and certainly compared with global peers). Eskom debt has been solved yet there is no letup in the need for market risk premiums. The same was even true of Eskom’s dollar- and rand-denominated debt, which both rallied during the weeks before the budget but showed only slight further momentum thereafter. The greylisting announced on Friday has certainly not helped — an event that was entirely avoidable if there had been a whole-of-government approach earlier.
The National Treasury squishing the fiscal framework and its issuance strategy into whatever container is thrown at it by the economy has never been the problem. Markets perhaps are sensing something deeper still amiss: growth, and specifically higher long-term potential growth.
Markets have a deeply, indeed overly zealous, scepticism about continuing reforms given the messiness of the elections ahead and the apparent absence of thought leadership in the political economy at large.
The highly positive debt relief package with conditions is being treated as a “we’ll believe it when we see it” by markets. This is offering some crazy opportunities for anyone who is more optimistic than the market. The spreads between Eskom and sovereign debt are wide at 50-70 basis points (bps) for the dollar debt in the shorter term and 100bp for Eskom’s rand debt, which can be picked up “free”.
There may be some shock here that will take time to get over. Treasury officials, in their inimitable style, have driven heavy artillery onto the rest of the government’s lawn with the conditions they have imposed on Eskom. While the broad framework has been signed off by the cabinet, the detail may well come as a shock to the department of mineral resources & energy, the department of public enterprises and others — both for what it implies (a fundamental altering of the electricity supply industry at far faster a pace then ever previously conceived) and for their loss of control.
Clean coal, on-balance sheet nuclear and other forms of pipe dream adventurism are out of the window unless someone in the private sector can do it as an independent power producer (IPP) (spoiler alert: neither will be possible in a least-cost competitive framework).
The challenge will be a CEO for Eskom who can take on the corruption, criminal mafias and sabotage that have been challenged by De Ruyter, but that are still entrenched, while also navigating the unbundling of the electricity system and Eskom’s future role, and then still not be derailed by obsessions with the energy availability factor (EAF).
There is therefore a risk that minerals & energy, public enterprises and Eskom might counterattack and send the Treasury packing. Based on some of the perverse rhetoric in the past week that seems to be a real risk. Yet to do so would send a dramatic sovereign risk shock into markets like we haven’t seen since Nenegate and experienced only briefly during the Phala Phala nonresignation shenanigans in December. The Treasury is relying on the debt package to drive things forward. It is perhaps also relying on a minister who seems to relish, indeed is enjoying, the role he finds himself in.
Under the radar
However, the budget struck home as deeply serious. There seems to be an existential freakout within the ruling party about load-shedding. This is perhaps understandable as not only could the situation have been prevented over the past year, but nothing that will be done now will help for at least two years. As load-shedding intensifies into winter so the situation will worsen.
The budget then, knowing that timelines are long, was calm but decisive. Two of its key policy pushes largely flew under the radar and risk getting lost in the Eskom maelstrom.
The first was Treasury’s push to establish a public-private partnership (PPP) mechanism for energy transmission. This is perhaps the single most important thing most people have glossed over in the budget. Transmission is the biggest constraint on the transition to the future, load-shedding-free energy system. Putting such a PPP system in place will require solving all the outstanding delays in unbundling, a board and CEO for the National Transmission Company of SA and getting an independent entity doing whatever it takes to get new (mainly green) electrons on grid.
Then there was the announcement that the Treasury is planning legislation to remove regulation 16 of the Public Finance Management Act that governs PPPs and replace it with a risk-based framework, depending on deal size. It could be transformative in the face of capacity problems at all levels of government. It could also start to unlock the ability to move infrastructure forward much faster, and is long overdue.
Yet in the present fraught political environment the Treasury’s clear stance as evidenced by the abovementioned two nuggets, is likely to face a counterreaction. Still, the inevitability of change on both fronts when facilities are available means we are likely to get there in the end.
As things get somewhat madder in the run-up to next year’s election it is handy to know there is an adult in the room, not just for the underlying fiscal but the broader range of reforms needed. The results of all this won’t be felt for some years, though. And so we remain strapped onto the roller-coaster and markets remain on the back foot until evidence of progress becomes clear.