JOHANNESBURG – The markets’ attention will zoom in on President Cyril Ramaphosa this week to shed light on potential measures to keep Eskom afloat after it garnered a R15 billion loan facility on Friday.
Ramaphosa is due to deliver his second State of the Nation address on Thursday, and is expected to articulate the government’s plans to restructure the embattled power utility and other state-owned entities (SOEs).
Ramaphosa told the international community at the World Economic Forum two weeks ago that the government would announce “a set of measures to stabilise and improve the company’s (Eskom’s) financial position and to ensure uninterrupted energy supply”.
The special task team appointed by the president is said to have suggested that the power utility be divided into three units, responsible for generation, distribution and transmission, in what it called a “strategic unbundling”. And right there is the problem.
Tumisho Grater, an economic strategist at Novare, said some of the major issues Ramaphosa had to grapple with related to the quality and quantity of SOE’s guarantee exposures, as well as their debt obligations.
“Market participants are keeping a close eye on this issue, especially as restoring the financial and operational credibly of SOEs (Eskom in particular) will be a principal catalyst to the country’s economic growth,” Grater said.
“Greater bailout requirements from SOEs will make it more difficult to maintain the path of fiscal consolidation. This could lead to negative credit rating actions that would not be rand positive.”
Bank of America Merrill Lynch in a report on Friday said it estimated that a trailing budget deficit was outperforming the medium-term budget policy statement forecast by about R26bn.
“We see savings on the expenditure side and some under-performance on the revenue side. We think that these savings will be used to support the president’s economic stimulus and recovery plan and inject liquidity into cash-constrained SOEs (in particular, Eskom), conditional on restructuring plans.”
The proposed break-up of Eskom into three units is not new. The Energy Policy White Paper of 1998 made a case for the privatisation of Eskom and its division into the three entities.
Eskom’s debts, which are more than 20 times larger than those of South African Airways, reached 8.5 percent of gross domestic product (GDP) late last year.
London-based Capital Economics said the fear that the troubles at Eskom would lead to another downgrade of South Africa’s credit rating seemed overdone.
John Ashbourne, a senior emerging markets economist at Capital Economics, said even a full bailout of Eskom posed less of a risk to the fiscal position than many feared.
“Moving all of Eskom’s debt on to the government’s balance sheet would push the state’s debt-to-GDP ratio up from 57 percent to 66 percent, which would probably spook the markets and cause the rand to weaken,” Ashbourne said.
“But the actual rise in the state’s debt liabilities would be smaller. The government already guarantees R350bn out of Eskom’s R420bn debt, meaning that the increase in state-backed debt would be worth just 1.4 percent of GDP.”
Eskom on Friday said it has secured R15bn loan facility with a consortium of lenders.
Phakamani Hadebe, Eskom’s group chief executive, said the company had made significant progress in transitioning the business and securing funding.
“We are pleased that lenders have elected to continue partnering with Eskom on our journey to complete the capital expansion programme for the benefit of South Africa’s economy,” Hadebe said.
“It is also encouraging to see that financial markets continue to view Eskom in a positive light as we progress towards financial and operational sustainability.”