This column was first published in Business Day
Governments globally lean on the banking system when they need cash. SA is no exception. During the latter half of the Zuma presidency, as the financial position of state-owned enterprises (SOEs) deteriorated, banks sharply increased their lending to them. That creates problems for the economy and the banking system.
My analysis of banks’ statutory returns shows that the amount they lent to SOEs increased sharply from 2013 to 2018, when it reached a record high of R56.4bn, up 2.6 times from R21.6bn five years earlier. While the figures don’t break out just which SOEs received this cash, it is safe to assume that by far the biggest of these borrowers was Eskom.
Several issues arise when the banking system is being tapped in this way. The first is the overall risk of the system. Such lending is often driven more by political considerations than the usual balance of risk and return within an overall balance sheet context. Any bank has to be sensitive to being seen to support the government, especially on socially sensitive issues as serious as keeping the lights on.
The growth in lending increased banks’ exposure to SOEs from about 0.6% of total assets to 1.1%, almost doubling. Such loans can be a mix of short and long term, but as has been made clear by several recent examples (SAA most prominently), banks are often forced to roll over their SOE loans, so even short-term ones on paper are long-term in practice.
By directing their funds to SOEs, banks are often lengthening their balance sheets, meaning they can’t do as much other long-term lending, such as for mortgages.