Fund manager halts loans to South African state firms over ‘independence concerns’

Futuregrowth chief investment officer Andrew Canter said in an interview with Bloomberg, that was posted on the fund manager’s web site on 31 August, that it had shelved plans to lend more than ZAR1.8 billion ($123 million), but he did not go into detail.

The companies concerned are national power utility Eskom Holdings, rail and ports operator Transnet, the South African National Roads Agency, the Land Bank of South Africa, the Industrial Development Corp. of South Africa and the Development Bank of Southern Africa.

Canter said Futuregrowth “will only resume offering loans and rolling over existing debt once it has determined that what it sees as proper oversight and governance at the companies have been restored”.

However, Canter said “the decision won’t immediately affect lending to the government and other state bodies such as water boards and municipalities”.

Canter said: “We’ve observed recent reports that strongly hint of conflict between branches of South Africa’s government, the possible machinations of patronage networks and a seeming challenge to the National Treasury’s independence. Any material risk to the state-owned entities’ governance, budgeting and approval processes for spending or lending must impact on our forward-looking credit assessments. It is difficult to make reasoned and defensible decisions to continue providing state-owned companies with additional funding using clients’ money.”

Futuregrowth’s comments came after South Africa’s government announced that President Jacob Zuma is to directly oversee the strategy of all state-owned companies, and any government “interventions” that might be necessary, through the creation of a special presidential coordinating committee that he will chair. A statement from the president’s office said the move was “not a new or sinister creation”.

According to Canter, the oversight role was previously delegated to ministers and he said the change “lacks clarity and context and creates uncertainty about who the companies will answer to”.

Futuregrowth said that should other asset managers follow its action, “it will increase the state companies’ borrowing costs and make it harder for them to finance plans to spend billions of rand on new infrastructure. The Treasury may also come under increased pressure to directly fund them and grant additional debt guarantees at a time when the economy is stagnating and it’s seeking to rein in the budget deficit to protect the country’s investment-grade credit rating.”

Eskom said on 1 September that it would “continue to engage with Futuregrowth and the broader investor community to understand the recent concerns raised regarding current and future investments into Eskom”.

Eskom’s chief financial officer Anoj Singh said Futuregrowth’s announcement “does not place Eskom’s funding plan at risk and I am confident that the funding for the year will be raised”.

“As of the end of August 2016, Eskom has available liquidity of approximately ZAR38bn ($2.6bn) and has secured more than 57% of its borrowing requirement of ZAR69bn ($4.7bn) for the financial year 2016-17,” Singh said.