State Firms Debt May Threaten Financial Stability, SARB Says

JOHANNESBURG (Capital Markets in Africa) – The inability of South African state-owned companies to roll over debt could threaten the nation’s financial stability and ultimately result in more credit-rating downgrades, according to the central bank.

Governance issues at state companies, rising contingent liabilities and inadequate liquidity could add pressure to government finances through the increased use of guarantees, the Reserve Bank said in its six-monthly Financial Stability Review released in Pretoria on Wednesday.

“Financial stability centers around the ability of state-owned enterprises to roll over debt and achieve financial consolidation,” the central bank said. “Should state-owned enterprises fail to roll over debt, the government would be liable and might not be able to honor such debt.”

Ratings companies have flagged state firms’ finances as a concern in recent years. While Moody’s Investors Service kept the nation’s credit rating at investment grade and changed the outlook to stable from negative last month, it warned if risks at these companies materialize and increase the government’s debt burden, it could lead to downgrades.

Government guarantees to state companies are at more than 450 billion rand ($36 billion), according to data from the National Treasury. The state’s exposure to this increased to 64.5 percent in the past fiscal year from 54.4 percent as companies drew on the guarantees.

Power utility Eskom Holdings SOC Ltd. is the single biggest recipient of guarantees at 221 billion rand, followed by the Road Accident Fund at 189 billion rand, the central bank said. South African Airways said Tuesday it needs 5 billion rand from the government to cover immediate costs and warned it may struggle to make debt repayments due next year.

The rand, which has declined 0.5 percent versus the U.S. dollar this year, was little changed on Thursday morning at 12.4435 per dollar.