Sunday Times E-Edition

Eskom weighs on SA’s credit rating

S&P to include two-thirds of utility’s debt in government figures

By DINEO FAKU

● S&P Global Ratings has forecast higher national debt for South Africa as the government plans to take over a portion of Eskom’s debt to rejuvenate the struggling power utility.

The agency would include two-thirds of Eskom’s debt in its government debt figures from next year, said Zahabia Gupta, an S&P associate director.

“This is partly the reason we have net debt increasing from 67% of GDP this year to 72% next year,” Gupta said in a virtual overview of South Africa’s sovereign rating.

Eskom has implemented record load-shedding in 2022 as a lack of maintenance of its fleet weighed on economic prospects.

Finance minister Enoch Godongwana announced the government’s plans to take over a portion of the utility’s R400bn debt during the medium-term budget policy statement in October.

A lower debt burden is expected to pave the way for Eskom’s unbundling and enable it to invest in electricity supply and transmission infrastructure.

Gupta said S&P would be watching to see how the debt transfer was managed, the sequencing and the preconditions around reforms at Eskom.

“Eskom has been one of the biggest drains on government resources and the economy, and resolving its financial and operational problems is important for the government. On the other hand, if the debt transfer is done without addressing some of the core issues at the company it could create risks around moral hazards and weigh on our outlook,” said Gupta.

Eskom’s near-collapse and shocks including the Covid pandemic have undermined the economy, with the growth rate too low to tackle rising unemployment.

Gupta expected growth to slow to 1.9% this year and average 1.6% over the next three years — too low to move the needle on unemployment.

“These levels are low for a country that has significant developmental needs like South Africa and a high unemployment rate of above 30%,” she said, adding that the low growth levels reflected a mixture of domestic and external constraints.

Jobs figures released by Stats SA this week showed the unemployment rate had declined to 32.9% in the third quarter from 34.34% in the second quarter.

The third-quarter job numbers underscored a better employment market in 2022 compared with the same period in 2021, as 1.2-million jobs were created over the year to date compared with 742,000 lost over the same period in 2021.

Busi Mavuso, Business Leadership South Africa CEO, said South Africa’s credit ratings from the three global agencies were still at their lowest since 1994.

“Moody’s has us two levels into sub-investment grade but the other two have us three tiers into junk status.

“There have been positive signals”, she said, referring to S&P in November keeping South Africa’s credit ratings unchanged and its outlook at positive.

“What might be needed is for the government to consider higher ratings to be a goal that cuts across all relevant departments, something that might be just what is needed to instil the necessary discipline across departments to expedite much-needed reforms.”

She said achieving investment-grade ratings meant South Africa would have to get important things right, including sufficient construction of renewable energy generation to reduce load-shedding and addressing infrastructure constraints.

The country’s freight rail and ports systems would have to have the capacity to transport all imports and exports efficiently, she said, referring to the hurdles at Transnet Freight Rail.

Last month, S&P affirmed its BB-/B long- and short-term foreign currency sovereign credit ratings on South Africa with the outlook remaining positive. Ratings agency Fitch affirmed its long-term foreign and local currency debt ratings at BB- and maintained a stable outlook.

Gupta said the positive outlook from S&P suggested a one-in-three chance of a rating upgrade for South Africa, as the agency tends to resolve its outlook in a year for speculative grade sovereigns.

“To upgrade the rating, what we will be looking to see is how the government manages some of the main fiscal risks, including liquidity concerns and the debt transfer for Eskom.

“We are also monitoring the implementation of reforms and its impact on improving growth and infrastructure shortfalls,” she said, adding that a more supportive external environment could provide headroom for the economy.

“On the other hand, we could revise the outlook back to stable if we see external or domestic developments derailing the growth trajectory, or if we see fiscal pressures increasing more significantly.”

Gupta referred to the risk of fiscal slippages as wages are expected to be higher from next year onwards, the continuation of the social relief of distress grant beyond the fiscal 2023 year, and potentially higher transfers to state-owned enterprises.

S&P has a conservative outlook for revenue, given that falling metal prices would affect tax revenue.

S&P had South Africa at investment grade until 2017.

The country’s foreign currency rating moved down five notches from BBB+ in 2012 to BBB- in 2020, driven mainly by the high fiscal deficit, worsening public sector debt and weak growth.

In 2020, S&P downgraded South Africa by one notch due to the risks posed by the Covid pandemic. Gupta said the external position had turned out better than anticipated in 2020 and the fiscal and debt position was also better than anticipated.

She said much of this was due to the recovery in mining and metals prices that supported key exports such as coal, iron ore, platinum group metals and gold, which resulted in a higher current account surplus in 2020 and 2021.

However, she expected the falling metal prices seen over recent months and lower assumptions, particularly for iron ore and gold, for the next two to three years to reduce the current account surplus to almost zero this year and then to deficits averaging 1% of GDP over the next three years.

To upgrade the rating, what we will be looking to see is how the government manages some of the main fiscal risks, including liquidity concerns and the debt transfer for Eskom

Zahabia Gupta

S&P associate director

Business Times

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2022-12-04T08:00:00.0000000Z

2022-12-04T08:00:00.0000000Z

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