Eskom is set for a bumper cash injection as legislators walk a fiscal tightrope today to decide on the special appropriation bill to release nearly R60 billion to keep it afloat.
Reports yesterday suggested that Finance Minister Tito Mboweni would ask for a tap into the National Revenue Fund to give Eskom R26bn for the current financial year and a further R33bn for the 2020/21 fiscal year. The move to boost Eskom’s thin balance sheet follows an undertaking by President Cyril Ramaphosa last month to allocate a significant portion of the R230bn fiscal support for Eskom over the next 10 years. But the International Institute of Finance (IIF) has warned that support for Eskom will see the budget deficit expand to nearly 6 percent.
The IIF said in a research note yesterday that nominal gross domestic product (GDP) growth would undershoot the government’s target for this fiscal year. “Together with cyclical revenue weakness, the front loading of financial support to Eskom will likely widen the fiscal deficit to nearly 6 percent of GDP in 2019, much larger than the government’s 4.5 percent of GDP target for the 2019/20 fiscal year,” the IIF said.
“The structure of Eskom support (capital injection, debt transfer, or some combination thereof) will determine the extent of the deterioration of government deficit and debt.” The IIF warned that unless the government were able to introduce meaningful corrective measures to stop the deterioration in the fiscal deficit and public debt ahead of the next Moody’s rating review scheduled for November, “the risk of a credit rating downgrade to non-investment grade has risen”.
Moody’s has already indicated that South Africa will lose its investment-grade credit rating if its debt levels rose further. In February, the National Treasury said that it had allocated R23bn a year over the next decade to shore up Eskom’s books, but Eskom said the allocation would not be enough for it to meet its debt obligations. North West University Business School economist Professor Raymond Parsons said the additional bail out for Eskom would put an extra burden on the medium-term Budget policy statement in October. Parson said new expenditures and falling tax revenues would also see a deterioration in South Africa’s public debt-to-GDP ratios.
“It is essential for Eskom to get a cash injection from the government now to tide it over its current debt obligations and to help keep the lights on. But this needs to be coupled with a irreversible commitment to implement restructuring or unbundling of Eskom to stabilise it in the longer term,” Parsons said. “Bail-outs of this magnitude cannot be repeated.” The power producer is without a permanent chief executive after the demands of the job wore down Phakamani Hadebe, who quit the role citing poor health. Hadebe was the utility’s 12th chief executive since 2007. Eskom treasurer Andre Pillay also quit this month.
Mboweni last week said a broad strategic framework would culminate in a white paper that would deal with the government’s expectations on the role of state-owned entities in a fast-changing micro and macro-economic environment.