Is SA heading for a credit rating downgrade due to Eskom crisis?
Opinion / 16 January 2020, 6:23pm / Mlondi Mdluli.
Eskom continues to pose a great threat to South Africa’s economy, making it likely that South Africa will be downgraded to junk status in the coming months. The recent load-shedding, that is affecting the entire country, is a clear indication that the problems faced by the power utility are far from over.
Over the years, Eskom has received bailouts worth billions from the state to fix its dire situation. However, the situation at the power utility continues to worsen. Eskom’s new Chief Executive Officer Andre de Ruyter has his work cut out, as he must ensure that the situation at Eskom is fixed urgently because the instability of the utility leaves South Africa’s economy hanging by a thread.
Eskom generates approximately 95 percent of the electricity used in South Africa and approximately 45 percent of the electricity used in Africa. It is also by far the largest of South Africa’s many state-owned enterprises and, unfortunately, it is the single largest threat to South Africa’s economy.
The power utility is currently faced with two major problems. Firstly, its operating costs are too high, therefore, it cannot afford to pay them. Secondly, the utility has incurred over R400 billion in debt and does not generate enough cash to pay the interest on its debts.
Corruption and maladministration are the main factors that have resulted to the problems that Eskom currently faces. Over the years, Eskom has failed to adequately maintain its power systems and has also failed to construct new power stations in time, in order to meet the country’s growing demand for electricity. Therefore, the utility has been forced to implement load-shedding over the years.
The manufacturing industry is most affected by load-shedding because manufacturers are forced stop production during power cuts, while their costs and deadlines are not stopping. This is heavily affecting South Africa’s economy because manufacturing accounts for about 14 percent of South Africa’s gross domestic product. The agricultural industry has also been severely affected by load-shedding because farmers are reliant on electricity for farming activities.
Consumers are also affected by electricity blackouts because over 25 percent of the country’s food is produced by irrigation-reliant and energy intensive industries.
Moody’s Investors Service downgraded its credit rating outlook on South Africa to negative, in its November 2019 review, but affirmed South Africa’s long-term foreign and local currency debt ratings at Baa3- the lowest investment grade level. It further slashed South Africa’s economic growth outlook for 2020 from 1.5% to 1%.
Moody’s has additionally given Minister of Finance Tito Mboweni until the February 2020 budget to deliver a plan to stabilise government debt and address risks posed by state owned enterprises-mainly Eskom- on the fiscus or face a junk downgrade. Standard and Poor’s (S&P) Global also downgraded its outlook on South Africa, placing the country’s local currency rating at BB+. S&P Global further made a special mention of Eskom in its statement, stating that the power utility is likely to be an enduring drain on South Africa’s fiscal resources. Fitch also downgraded South Africa’s outlook from stable to negative, in its latest rating. From the big three credit rating agencies, Fitch and S&P Global are the only rating agencies that dropped the nation’s investment grade to non-investment grade.
Unfortunately, the government is increasingly running out of time to convince investors and rating agencies that it has the situation at Eskom under control. Power cuts that continue to be implemented make it difficult for South Africa to escape the prospect of a credit rating downgrade to junk, in a few months to come.
The resignation of Eskom board chairperson Jabu Mabuza, is a clear indication that the power utility’s woes are far from being over. Last week, the World Bank released its Global Economic Prospects report, which outlined the global lender’s decision to cut South Africa’s growth forecast to below 1 percent, due to electricity supply concerns. This decision by the World Bank further indicates that 2020 could be a very tough year for South Africa.
A credit rating downgrade to junk status will affect South Africa in so many ways. Firstly, the cost of borrowing will increase, making it difficult for many South Africans to borrow money from banks.
Secondly, International funds will take money out of South Africa. Therefore, this will result in a significant amount of capital leaving the country. Thirdly, the rand will weaken, and goods will cost more. Fourthly, treasury could find itself forced to increase taxes in order to draw money into the fiscus. Lastly, treasury might even be forced to cut social grants in order to repay its debt.
All the attention is now on Finance Minister Tito Mboweni’s budget speech presentation, that will be delivered in February. One can only hope that the minister will be able to provide a comprehensive plan that will effectively stabilise government debt and address risks posed by state-owned enterprises-mainly Eskom- that will be welcomed by foreign investors and rating agencies.
* Mlondi Mdluli is a Postgraduate Economics student at the University of KwaZulu-Natal.