In the recent Budget, the Treasury announced support for Eskom (almost R200 billion extra compared to the 2022 budget), but its projections of the primary balance and debt improved relative to the previous Budget Review because of the way that the Treasury accounted for the bailout in its financial statements.
While there has been a fair bit of discussion of the Treasury’s treatment of the Eskom bailout, few analysts have analysed the appropriateness of the approach to the Eskom bailouts from the perspective of taxpayers. By guaranteeing Eskom’s debt for the next three years, it creates profit opportunities for hedge funds that have been earning a yield premium on Eskom bonds. While the bailout did impose conditionalities on Eskom to receive debt relief, an alternative was explicit debt structuring and taking more of Eskom’s debt onto the government balance sheet. Yet I have not seen analysis of whether an alternative approach to debt restructuring would have allowed Eskom to borrow more cheaply or would have reduced overall bailout costs. There were also many alternative options available, such as capitalising the National Transmission Company. The Treasury has not signaled an intention to guarantee new long-term Eskom debt, so there remain many questions about how to fundamentally solve South Africa’s load shedding problems and support the long-run sustainability of the utility.
So why did the financial position of the government appear to improve in spite of the Eskom bailout? Treasury changed its accounting treatment of cash support for Eskom from ‘payments for financial assets’ (which are included in non-interest expenditure) to ‘debt redemptions’, so these costs are now no longer included in non-interest expenditure in the main budget.
Arguably, providing support to Eskom the way Treasury has is like the government taking money out of one pocket and putting it in another. And it doesn’t appear to be incorrect in an accounting sense.
But this does complicate assessment of the fiscal position. Some, like the Public Economy Project (PEP), argue that it is inappropriate to exclude the bailout from the government’s main budget balance and main government debt position because it takes the form of direct cash advance and creates new debt obligations for government. They also argue that it is highly likely that further government support will be needed for Eskom and that this creates ambiguity in the treatment of cash transfers to other state-owned corporations such as SANRAL, which are currently accounted for as expenditure. Apart from affecting comparability of historical budget review projections with the 2023 projections, the PEP argue that this creates a false impression that the government’s financial position will stabilise over the medium term.
The changes imply that economists doing fiscal analysis will now need to make lots of adjustments to the data they use and there will be less consensus about what the main budget figures imply. The PEP argue, for example, that government’s fiscal impulse is subtracting more from growth. This is different from the IMF’s latest assessment, which suggested that fiscal policy has remained broadly stimulative over recent years. Expect more debate among economists about the cyclical impact of fiscal policy and fiscal sustainability.