Finance minister Enoch Godongwana will provide details on the size, timing and conditions of the Eskom debt relief package when he tables his medium-term budget policy statement on October 26, he said on Friday.
“We will be saying what is the quantum over what period, and what are the conditions to be attached, because if Eskom does not make efficiency improvements we are likely to come back ... moving forward, Eskom must be able to invest in productive infrastructure,” he said in an interview on the sidelines of the annual meetings of the IMF and World Bank.
As the strike at ailing Transnet continues to cripple exports and the economy, Godongwana also said he will say something about Transnet in the budget statement.
“It presented a facade of an efficient institution, but now things begin to burst out into the open ... If we don’t make an intervention we are going to have another Eskom on our hands,” he said, adding any intervention is likely to include financial and operational aspects.
Markets are eagerly awaiting the details of an Eskom debt solution after President Cyril Ramaphosa promised this in July when he announced his energy emergency plan and said the debt would be addressed in the medium-term budget.
Eskom’s operations do not generate enough cash to meet the interest and capital payments on its almost R400bn of debt, much of which is guaranteed by the government. It depends on large annual cash infusions from the government to remain a going concern.
The government undertook more than four years ago to find a debt solution that would make Eskom financially sustainable, but the issue was put back on the table only when Ramaphosa announced his energy emergency plan in July. Godongwana and Treasury officials said in July that the government would take over a portion of the Eskom debt and promised “broad brush” details at budget time.
Any transfer of debt will require agreement from the investors or lenders holding each debt instrument, and it is expected the package will be finalised next year only after talks with them.
While many in the market are expecting the debt relief package to focus on the guaranteed portion of the Eskom debt, Godongwana said it has not yet been decided whether it will target just the guaranteed debt or also unguaranteed debt. Eskom is understood to be keen to look at some of the more expensive unguaranteed debt as well.
RMB Morgan Stanley economist Andrea Masia calculates that if the government were to take over R250bn of Eskom’s guaranteed debt in 2023/2024 this would lift the government’s debt ratio to 72%, from the 68.5% it would otherwise have been.
In a recent report he argued that this is an “opportune time to address the Eskom overhang”, with the fiscal deficit likely to come in far lower than February’s budget estimate thanks to the revenue windfall and well-contained spending growth, and the government’s debt ratio starting to stabilise as early as this year.
Addressing the uncertainty about the Eskom overhang could significantly cut the cost at which the government borrows on the market, Masia argued.
Debt sustainability
Deutsche Bank strategist Anthony Wong and economist Danelee Masia said an Eskom debt transfer of R100bn might be relatively easy for the government to absorb, but going beyond this might raise questions about debt sustainability, particularly in a low-growth environment.
However, the impact on SA’s overall creditworthiness would be positive irrespective of the amount transferred if a debt transfer is combined with successful restructuring of Eskom that leaves it financially independent, they said in a report.
SA has since the start of the Covid-19 pandemic borrowed more than $8bn from multilateral institutions including the IMF and World Bank, and Godongwana said that while the government had originally been cautious on this, the two institutions are now quite different from what they were in the 1980s.
He welcomed the fact that the Group of Seven is adopting the attitude that developing nations have had for a while and arguing for reforms to the shape and focus of the two institutions.
And he said he was struck by the warmth and respect they had for SA and their willingness to support the country financially and technically.
Godongwana said he spent a lot of his time in Washington in talks on climate financing for SA, including on the $8.5bn just energy transition investment plan due to be announced at the COP27 climate summit in Egypt next month.
The IMF now expects SA’s economy to grow 2.1% in 2022, with a strong recovery in the services sector, particularly tourism, helping to offset the effect of load-shedding and floods. But it expects growth to fall to 1.1% in 2023, with external conditions deteriorating and commodity prices correcting.
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