The Johannesburg Stock Exchange. File picture: Siphiwe Sibeko

JOHANNESBURG - Economists  warn that a weaker rand lies ahead as the South African Reserve Bank signalled that the financial condition of the country’s state-owned enterprises (SOEs) could lead to them defaulting on debt obligations, which could not only adversely affect government finances, but also other financial institutions exposed to these enterprises.
In its Financial Stability report published on Friday, the central bank said most SOE’s would not be viable entities without government support.

Government financial guarantees have continued to increase, but the government’s overall guarantees to SOEs “are expected to remain within the 10percent to 11percent of gross domestic product range”.

“However, SOEs continued to report weak financial results due to operational inefficiencies, weak corporate governance structures, and poor procurement practices,” the central bank said.

Answering a parliamentary question earlier this year, Finance Minister Malusi Gigaba said nine of South Africa’s state-owned entities racked up a debt of close to R700billion in the 2015-16 financial year on which they had to pay R51billion worth of interest.

New SAA chief executive Vuyani Jarana has already met with the country’s big banks to negotiate the refinancing of about R6bn in outstanding loans.

Banks unhappy

The banks include Standard Bank, FirstRand, Nedbank, Investec and Barclays Africa. International banks have already shown their displeasure with the debt-ridden SOEs.

This year alone the government has transferred in excess of R5bn to the national carrier to avoid it defaulting on debt owed to Citigroup and Standard Chartered after the banks refused to extend the terms of the loans.

Richard Downing, an economist at the South African Chamber of Commerce and Industry, said the extension of the country’s expenditure ceiling was inevitable due to the guarantees for financially stressed and ill-managed state-owned enterprises.

“In particular SAA and the South African Post Office, (Sapo) to which an additional R13.7bn will be transferred in the 2017/18 fiscal year, with SAA getting R10bn and Sapo R3.7bn,” Downing said.

Peter Montalto, a research analyst at Nomura, agreed, saying South Africas SOEs presented a real systematic risk to the economy.

“We believe the issue of parastatals, their risks, governance, funding restraints and links to the sovereign will become an increasingly important issue for the rating agencies, and ultimately be a contributory factor in pushing both Standard & Poor’s and Moody’s over the edge into junk status,” Montalto said.

Rand to slide

As the country and economy grapple with the financial decay of SOEs and mismanagement scandals, BMI Research, a subsidiary of the Fitch Group, on Friday said South Africa’s slow growth and high inflation suggested depreciation for the rand lies ahead.

“We see the rand as set for a gradual sell-off, forecasting the currency will end 2017 at R13.95 to the dollar.

“This is revised from our prior forecast of R13.10, and reflects our view that the resumption of a gradual down trend is likely to begin before the end of this year,” BMI said.

The rand, which has been reeling post the underwhelming Medium-Term Budget Policy Statement, is expected to see no respite this week.

Annabel Bishop,chief economist at Investec, on Friday said the rand would continue to weaken on fears of sub-investment credit rating reviews expected.

“In the week ahead (this week), the rand is expected to trade in a range of R14.10 to R14.80 to the dollar, R17.30 to R16.40 to the euro and R19.40 to R18.70 to the British pound, with the risk towards depreciation as fears of downgrades persist,” Kaplan said.

Meanwhile, the World Bank’s flagship annual publication released last week showed that South Africa ranked 82nd out of 190 counties in the ease of doing business index.

It was the only large economy which received a worse score in 2016 than in 2017.