The government’s abrupt U-turn last week, ahead of a high court judgment on the proposed electronic tolling of Gauteng’s freeways, has earned the SA National Roads Agency Limited (Sanral) a black mark from Moody’s Investors Service.
The policy reversal also has implications for the government. In a note released earlier this week, Moody’s senior analyst Francesco Soldi and analyst Kenneth Morare said: “Sanral relied extensively on borrowed funds to finance its operations and capex, benefiting from the implicit guarantee of the government of South Africa. In the past five years, the agency raised more than R33.5 billion from local investors and is currently one of the largest borrowers in the country.”
Two months ago, the rating agency cut Sanral from A3 to Baa1 with a negative outlook – in other words the next move would probably be down.
On Monday, the Moody’s analysts issued another warning. They said “any final pronouncement against” Gauteng Freeway Improvement Project (GFIP) e-tolls would have “severe credit-negative repercussions for the road agency and… exert further negative pressure on the finances” of the government, which is Sanral’s only shareholder and guarantor of a large chunk of its debt.
“A decision to halt GFIP tolls would be an event of default for the R10bn in government-guaranteed notes, (equal to half of the GFIP debt) and could trigger immediate debt acceleration by bondholders.”
Goolam Ballim, Standard Bank’s chief economist, said “debt acceleration” meant Sanral could be required to pay the entire loan ahead of the dates originally scheduled.
The decision, by the ANC and trade union federation Cosatu, to delay tolling for a month, came last Thursday, while the National Treasury was in the Gauteng North High Court arguing against a postponement. On Saturday, the court granted the interdict requested by the Opposition to Urban Tolling Alliance and halted the process for a full review.
The Moody’s analysts pointed out that Sanral relied on e-toll revenues to service its debt of R20bn, incurred to finance the GFIP’s construction and absorb operating costs. The postponement added uncertainty and “establishes a precedent for a final court decision on GFIP e-tolls, which we expect by the end of May or June”.
Whatever the merits of e-tolling itself, the last-minute decision to postpone the start of the controversial system has “serious implications for the image of National Treasury”, according to Econometrix chief economist Azar Jammine.
Moody’s, along with rivals Standard & Poor’s and Fitch Ratings, have already downgraded the country’s sovereign outlook from stable to negative.
Jammine, who believes that e-tolling is an ineffective and costly way of raising the revenue needed for the country’s road network, is nevertheless concerned about the impact of the public relations fiasco on investor perceptions.
Rating agencies were sceptical in February, when Gordhan said the government’s budget deficit – the gap between revenue and spending – could be cut from 4.8 percent of gross domestic product this year to 3 percent within two years.
The medium-term budget projections now appear to be compromised. The postponement of e-tolling will require the government to further subsidise Sanral, after R5.75bn was allocated in the Budget in February. And, if the delay in e-tolling results in a further downgrade for Sanral, the event will boost the agency’s interest bill.
The government, whose inept handling of e-tolling is drawing adverse comment, will suffer more collateral damage.
However, Ballim noted there were two elements to default: the ability and the willingness of the debtor to repay. If Sanral was unable but willing to pay, the default would not be “an indelible blot” on South Africa’s credit standing.