Moody’s yesterday put South Africa on notice that it might downgrade the country following the further bailout of Eskom, which is likely to widen the government’s debt-to-gross domestic product (GDP) and put further constraints on the already burdened fiscus.
Moody’s, which is the only one of the major rating agencies that still has the country’s sovereign debt above junk status, slammed the government’s R59 billion support for the power utility over the next two years in the absence of a credible plan to stabilise it.
Lucie Villa, Moody’s vice-president, said the additional financial support announced this week by Finance Minister Tito Mboweni is credit negative for the country and will be a further drain on public finances.
“The lack of a strategy to return Eskom to more stable financial situation that would reduce the need for government support exacerbates the problem for the government,” Villa said.
“No clear strategic turnaround plan agreeable to all stakeholders has emerged yet, fuelling risks for the government of having to provide additional support.” The rating agency is scheduled to provide its update on South Africa’s rating in November after October’s medium-term budget policy statement.
Mboweni said this week that the state would assist the embattled power producer. With an additional R26bn this year and R33bn next year on top of the R23 billion a year over the next three years it allocated to the power producer in the February budget.
The latest financial support for the power producer means the government would have supported it with R49bn in the 2019/20 financial year and R56bn in the 2020/21 period and R23bn in financial year 2022, with at least another R100bn in the pipeline in the coming years.
Moody’s said if the additional support for Eskom was not compensated for, the country’s fiscal deficit would widen to 5.7 percent of GDP this year and 5.6 percent next year.
The Institute of International Finance this month said South Africa’s debt-to-GDP has reached 59.3 percent in the first quarter of this year from 54.7 percent a year earlier.
Maarten Ackerman, the chief economist at Citadel, said the situation government is in right now is a negative one, from a fiscal and ratings perspective.
“Government’s hands are essentially tied in terms of making more money available for crucial spending on infrastructure projects or job creation. And unfortunately, a significant portion of government spending is currently being allocated towards keeping the State-Owned Entities such as Eskom and SAA afloat, which is not economically productive spending,” Ackerman said.
Eskom, whose debt is fast approaching the R500bn mark, is yet to fill the post of chief executive after the abrupt resignation of Phakamani Hadebe two months ago.
The utililty is also yet to appoint a chief reorganisation officer who is expected to oversee the break up of the company into three distinct entities responsible for transmission, distribution and generation which was announced in February.
Energy expert Ted Blom said the multibillion-rand financial support for Eskom would not arrest its operational and financial woes.
“The recently announced bailout is just more kicking the can down the road. Eventually, real action will have to take place because currently just pouring money into the Eskom sieve will not solve its mammoth challenges,” Blom said.