Moody’s backs SA’s credit profile but warns of Eskom risk
JOHANNESBURG – Moody’s yesterday took South Africans into its confidence on its decision not to provide guidance on the country's sovereign debt on Friday as scheduled and said it backed the country's credit profile to remain in line with those of investment-rated sovereigns.
The rating agency said in an updated credit opinion that the country's credit profile was supported by a diversified economy, a sound macroeconomic policy framework and a deep pool of domestic investors, due to a well-developed financial sector and markets.
However, it warned that Eskom would remain the main source of contingent liability risk for the fiscus.
Moody’s lead sovereign analyst for South Africa, Lucie Villa, said Eskom’s debt amounted to about 8 percent of gross domestic product, 5 percent of which was from government guarantees.
“Capital transfers from the government, combined with the tariff increases announced by the National Energy Regulator of South Africa in March, which were below what was requested by Eskom, may prove insufficient to address the company's long-standing financial troubles,” Villa said.
In February, the government said that it would lend R69 billion to the power utility over the next three years. It said it also planned to break Eskom into three separate units of generation, transmission and distribution.
The utility's debt stands at about R420bn.
Eskom will today address the media on the progress it has made in arresting the debilitating blackouts that took place in February and March.
Investec chief economist Annabel Bishop said: “Eskom has put a serious drag on the economy, both from a sentiment point of view as the results, and possibly the passing of the several months afterwards to see if faster economic growth, substantial governance repair and some improvement in policies and fiscal metrics occurs.”
Moody’s drew scorn from some quarters when it did not provide reasons for its decision to give a rating update on Friday – a decision that effectively left South Africa’s sovereign rating at investment level (Baa3) with a stable outlook.
The agency said it would consider upgrading South Africa if the government implemented successful structural reforms that could increase growth and stabilise the debt burden relative to its investment-grade peers.
Moody’s said the reforms should include reducing contingent liabilities to state-owned entities (SOEs).
The New York-based agency warned that it would downgrade South Africa’s rand-denominated credit rating should government debt and contingent liabilities risk from SOEs continue rising to levels no longer consistent with Baa3.
Moody’s further said that should medium-term growth persist at very low levels, as recorded in 2018, this would trigger a credit negative.
Villa said Moody’s expected South Africa’s economy to pick up modestly at 1.3 percent this year, converging to 1.5 percent in the following years.
“The gradual implementation of the reform agenda of the new administration, combined with the reduction in political uncertainty following the May elections, will have a positive impact on confidence and lead to a gradual improvement in economic conditions,” Villa said.
“We caution, however, that the economy will likely continue to face significant supply-side constraints, including from its electricity supply.”