S&P Global Ratings analysts have warned that the government’s debt relief package for Eskom is not enough to make it a financially sustainable company, stacking up pressure on the public enterprises department to speed up the break-up of the troubled state power utility.
The ratings agency lifted Eskom to a B rating last week, five notches below investment grade, meaning the utility can meet its financial obligations but is more exposed to economic and external shocks.
The upgrade reflected Eskom’s improved liquidity position, supported by the government’s R254bn debt relief package over three years, as well as improved cash collection from customers and reduced capital expenditure. Still, the support package of 3.5% of GDP over three years is insufficient to address operational challenges at Eskom, which is on course to lose another R20bn-plus in the 2024 financial year.
“We are clearly saying the support is not enough for it to be a financially sustainable company going forward, especially if it plans to maintain its current role in the energy sector, which we think is looking less and less likely,” Zahabia Gupta, an associate director in the sovereign ratings team, said in a webinar last week.
Her sentiments were echoed by Omega Collocott, S&P’s director of corporate ratings for SA, who said that Eskom remains in a fragile state despite state support.
“We recognise the debt relief as having some benefits from a liquidity point of view but I think one of the key concerns at the moment is that operationally Eskom is still in a fragile state,” Collocott said in the webinar.
Their comments could put pressure on the government to speed up the break-up of Eskom, which would reduce its costly and dominant role in the energy sector.
The government plan is to split Eskom into three separate entities: generation, transmission and distribution, with the aims of improving efficiency and attracting private investment and competition.
However, the plan faces regulatory and legal uncertainties and political resistance in the lead-up to the 2024 elections, which are widely expected to see the ANC slip below 50% for the first time and send SA into the uncharted territory of coalition politics for the first time at a national level.
Gupta said the outcome of the national elections would have implications for policy continuity and execution, as well as for business sentiment.
President Cyril Ramaphosa, who has staked his reputation on reviving the economy, has taken politically bold steps to overhaul the electricity and transport sectors, which have been largely welcomed by
businesses.
But he has also faced criticism from business leaders for being too slow to deliver on
his promises.
Gupta said the most likely scenario is that the ANC will get a small majority or be in a coalition with smaller parties, in which case policy continuity would be expected.
“That’s what we baked into our numbers,” said Gupta, who was speaking a week after S&P reaffirmed long-term foreign currency and local currency sovereign credit ratings at
BB-/B and BB/B, respectively, with a stable outlook.
Policy
The second election outcome scenario is that the ANC would have to partner with the DA, which could lead to faster execution of reforms, Gupta said. “Having said that, coalition at a national level [hasn’t] really been tested so what we’ve seen in terms of experience at different levels of government, it doesn’t bode too well when it comes to smooth policy making.”
She said a coalition with the EFF would raise more questions about policy direction and could have an immediate negative impact on the economy.
“If there were to be a coalition with the EFF, I think there would be more questions about where policymaking might go, especially because of the stated policy they have supported in the past around land reform, appropriation of assets and the nationalisation of the [Reserve Bank],” Gupta said. “There could be more questions around that. I think it might have an immediate impact on business sentiment and bond yields.”
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