27 August 2018

Hope Fades in South Africa

By Xander Snyder 

When South Africa’s new president, Cyril Ramaphosa, was sworn into office in February, there was hope that he would open a new chapter in South African politics and address some of the country’s structural economic problems. But that hope is beginning to fade. The government is reportedly considering providing a bailout worth 59 billion rand ($4.1 billion) to several South African state-owned enterprises, in addition to another proposed assistance program worth 43 billion rand. Unsurprisingly, this has raised concerns about the government’s financial position. Several SOEs, including the South African National Roads Agency, Eskom (an energy company that provides 90 percent of the country’s power) and South African Airways, have been struggling financially for years. The South African Post Office, which has recently taken over responsibility from the South Africa Social Security Agency for disbursing social security payments to 17 million citizens, may also need government assistance.

The crux of the problem is that the South African government is short on cash. It can invest only so much in critical infrastructure and social services like education and health care. These types of investments could help narrow the country’s wealth gap and, perhaps in time, stabilize the economy. But it just doesn’t have a lot of options. The government has taken on more and more debt to pay for bailouts and other stimulus packages, but this has frustrated many South Africans who see corporate managers compensated for running losses at the taxpayers’ expense. The government could also raise funds through privatization, but this is a politically unpopular move because it often leads to layoffs. 

The money for the bailout that’s currently being considered wasn’t accounted for in the most recent government budget. It’s unclear where the money will come from, but the two most obvious possibilities are a tax hike or more debt. Another option is to dip into the government employee retirement fund, a controversial plan but one that has been discussed. The Public Investment Corporation, a government-owned asset manager that handles 1.9 trillion rand worth of assets, manages the Government Employees Pension Fund. Last September, there were rumors that the finance minister was planning to use 100 billion rand from PIC-managed funds to bail out ailing SOEs. The minister and the PIC have denied this. The National Treasury, moreover, has said the PIC would deny a 6 billion rand loan request from South African Airways.

The PIC did, however, provide a 5 billion rand bridge loan to Eskom in February to cover the company’s operating loss for the month. At the time, though, it was still seeking another 15 billion rand from other lenders. Labor unions had mixed reactions to the bailout. The Congress of South African Trade Unions supported it, saying that Eskom was too big to fail, but it also expressed frustration that the company needed to turn to the PIC for cash. Two other labor unions, the Public Servants Association and the South African Federation of Trade Unions, opposed the measure.

Ramaphosa has also been seeking investment from outside South Africa. Earlier this year, he created a team of economic experts to raise $100 billion in investments worldwide, and it appears that it may be making some progress. It secured a $21 billion investment pledge from Gulf states and another $15 billion pledge from China. A pledge isn’t a guarantee, of course, but it’s a start.

There is, however, a broader issue that could derail plans to attract foreign investment: property redistribution. In the past year, the African National Congress has seemed increasingly committed to amending section 25 of the constitution, which prohibits land expropriation without compensation. The Amendment would allow the government to redistribute assets from the largely white property-owning class to the black majority. On one hand, it’s hard to imagine that South Africa – the most economically unequal country in the world, according to the World Bank – could solve its economic problems without first resolving this fundamental issue. On the other hand, property redistribution would spook international investors at a time when cash is already scarce, foreign investment is desperately needed, and government debt continues to climb.

The dilemma for the South African government is that each solution comes at a cost. For the time being, the economy will probably stagger along through tactical adjustments, but they won’t solve the structural challenges that have plagued the country for so long. 

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