S&P Global Ratings has warned that, while South Africa’s State-owned electricity utility Eskom is currently considered too big to fail, it may well also be “too big to support”, owing to the costs associated with stabilising the group’s finances.
Speaking during a webcast on Thursday, sovereign ratings director Ravi Bhatia said that the recently announced financial support package for Eskom would act as a constraint on fiscal consolidation in South Africa and raise the country’s overall debt burden.
Nevertheless, the commitment to inject R23-billion a year of additional funding into the utility was also not sufficient on its own to improve Eskom’s liquidity outlook and credit rating.
Bhatia also listed State-owned enterprise (SoE) restructuring as one of the reforms required to elevate South Africa’s growth rate, which remained “well below most emerging market peers on a per capita basis”.
S&P’s recently lowered it 2019 growth forecast to 1%, but Bhatia said that South Africa might well fall short of that lowered forecast in light of the 3.2% gross domestic product collapse in the first quarter. The contraction was the country’s worst since 2009, a year when it slumped into a recession.
In March, S&P Global Ratings revised its outlook on Eskom to stable from negative, but maintained a CCC+ subinvestment-grade credit rating on the utility. It also stated that the rating would have been two notches lower on a standalone basis, or assuming a low likelihood of government support.
Corporate ratings director Omega Collocott told webcast participants that the R23-billion a year of additional funding had reduced the risk of funding shortfalls over the coming six months, as well as uncertainty regarding the government's commitment to provide timely support to Eskom.
Nevertheless, it remained insufficient, on its own, to improve Eskom’s liquidity outlook, which would probably only be alleviated with additional direct support from government, higher tariffs, a resolution of outstanding municipal debts and the realisation of promised savings of R20-billion.
Collocott described Eskom's liquidity position as “exceptionally fragile” and indicated that the position was unlikely to change in the foreseeable future.
What had changed was the R23-billion-a-year commitment from government, which meant that immediate shortfalls, such as the one that arose in March after the China Development Bank’s funding was delayed, could be met.
During a similar liquidity crisis in early 2018, government offered only indirect support to Eskom in raising R20-billion of emergency funding from domestic banks to meet immediate debt obligations.
Collocott acknowledged that various further bail-out options were being considered for Eskom and indicated that one option would be to use the R350-billion guarantee framework to directly assume repayments on behalf of Eskom on a “pay-as-you-go" basis.
"The least impactful way to provide a bail-out, which is not to say it's the most sensible way, would possibly be to bleed government support into Eskom under the government guarantee support framework, where government undertakes to make certain debt repayments on Eskom's behalf."
In the longer-term, Bhatia suggested that government would have to assess whether or not to open markets currently dominated by SoEs to private sector participants.
"There is this view of Eskom being too big to fail, yet at the other side, too big to support, because it costs so much," Bhatia said, adding that government was currently walking a tightrope of providing fiscal transfers, while seeking to implement reforms to improve Eskom's commercial viability.