According to Investec chief economist Annabel Bishop, deep-seated problems at the State-Owned Entity cannot be resolved quickly or easily. Picture: Leon Lestrade/Independent Newspapers
South Africa’s trade outlook has remained modest so far this year and could have seen economic growth leaping higher than expected had it not been for logistical constraints experienced by Transnet holding back performance.
This comes as South Africa has recorded a substantial trade balance of R116.1 billion this year to date versus last year to October’s cumulative R30.2bn comparison as commodities prices have risen versus last year, with a stronger rand and a stronger term of trade.
Investec chief economist Annabel Bishop yesterday said some improvements on Transnet’s port congestion and rail freight capacity played a modest role as payload volumes increased slightly, but capacity constraints at Transnet overall remain dire.
S&P Global Ratings recently placed Transnet on a credit watch.
A credit watch is a precursor to a rating downgrade, and S&P noted the CreditWatch placement reflected its view that Transnet’s cash flow will not improve sufficiently or quickly enough to maintain its existing leverage, and capital structure.
S&P said Transnet also has a weaker governance structure and risk management framework relative to peers. Governance failures and irregularities, allegedly involving the company's former board and executive team, enabled operational mismanagement and misconduct related to procurement processes before 2019.
“It is key to note the freight capacity at Transnet’s port and rail services continue to run substantially below the demand for these services in the country, with the monopoly negatively impacting the growth potential of the country,” Bishop said.
“South Africa could have seen economic growth of over 4.0% year-on-year this year in the absence of the severe transport constraints. Deep-seated problems at the State-Owned Entity cannot be resolved quickly or easily.”
According to the South African Revenue Service, the goods trade surplus narrowed marginally by 1.4% to R177bn in the third quarter because the value of exports dropped marginally more than the value of imports.
Bishop said while the lift in commodities prices drove the value of exports higher, South Africa has also seen some progress at Transnet, although this was limited compared to the extent needed.
She said the State-owned freight and logistics operator was still stifling gross domestic product (GDP) growth by around 3.0% per annum.
S&P said that while it expected Transnet's performance to gradually improve as its turnaround initiatives and government-instituted freight logistics sector reforms slowly take effect, leverage and debt service costs remained very high.
Transnet is currently in talks with the African Development Bank to revive plans to establish a rolling-stock company that would supply the southern Africa region and the rest of the continent from as early as next year.
“Work is well underway in this regard within Transnet, with the process to open access to the private sector gaining momentum,” Transnet told Business Report last week.
“The rolling stock leasing company to be established is part of the rail reform agenda, and aims to drive the acquisition, management and leasing of rail rolling stock to domestic and regional markets. Transnet intends to go to market for a private partner for the establishment of a leasing company early in 2025.”
Notwithstanding the challenges facing Transnet, S&P said the company continued to play an instrumental role in South Africa's transport industry and by extension its economic growth, due to its control of all major logistics infrastructure.
“The constraints Transnet imposes on freight transport in the economy, and so on economic activity and real GDP growth are still dire, limiting GDP growth to below 1.0% this year, and inhibiting economic activity next year as well,” Bishop said.
“While continued, and substantial work on turning Transnet around is expected to continue, this will take several years due to the deep-rooted structural problems at the SOE, which will inhibit trade more so than tariffs from the Trump administration.”
BUSINESS REPORT