LUMKILE MONDI: Dire Eskom state can yet be turned to advantage

Last week I had a conversation with an Argentinian colleague over a cup of rooibos — since I could not offer her a cup of mate — about SA’s high debt-to-GDP ratio and the quasi-sovereign risk of Eskom’s R500bn debt. The discussion weaved between politics and what would happen if Eskom defaulted on its debt, triggering a cross-default event resulting in a sovereign default. 

She reminded me of the 2001 Argentine sovereign debt default, the largest default in history. Unlike SA, which has about 90% of its sovereign debt with domestic lenders, Argentina’s creditors were predominantly foreign. Argentina and the rest of Latin America have arguably some of the greatest minds in economics, contributing tremendously to international multilateral institutions, regional institutions and many departments of economics the world over. This endowment put Argentina in a stronger negotiation position following its sovereign default.

In the case of the 2001 Argentine default, international bondholders (creditors) and the IMF found themselves caught in a stalemate with the government in negotiating a deal. Although various alternatives were intensely debated, mainly with the IMF, the US government and private sector creditors, the preferred solution was collections action clauses, also known as the contractual approach. This involves provisions or contingency clauses placed in sovereign bond issues and other debt instruments such as bank loans. The collections action clauses grant private sector creditors and the respective national judicial systems greatly increased control over outstanding foreign public debts.

As the discussion went on my colleague asked me why the ANC is so dominant in the body politic of SA. I reminded her of the Peronistas. The pillars of the Peronist ideal, known as the “three flags”, are social justice, economic independence and political sovereignty, which are not too far removed from the ANC’s ideals. It was now my turn to share what could happen in the case of default in SA.

Following PW Botha’s infamous Rubicon speech in 1985 SA found itself in a debt standstill and was forced to negotiate with international financial creditors. The SA Reserve Bank and Treasury have over the years lost that experience of negotiating in times of crisis, and unlike Argentina SA does not have a large pool of economists working at multilateral institutions. So how would SA dig itself out of the mess the ANC government has created?

In the case of Eskom, President Cyril Ramaphosa has already pronounced on its restructuring, and one of the options is the transfer of debt to the mooted transmission state-owned company (SOC), which would be a subsidiary of Eskom. This provides an opportunity to negotiate with all the creditors on the restructuring of the tenure of the debt requiring longer dated maturities based on cashflows of the transmission SOC.

This should in fact happen now, even in the absence of a default. It is similar to the collection action clause of Argentina, but different in that it provides for Eskom to put pressure on lenders to have patience in closing a win-win deal over a longer period.

The World Bank and the China Development Bank loans of $3.75bn and $1.5bn respectively are “softer” targets for an Eskom debt restructuring. This then can be followed by both institutions underpinning the renegotiation with private lenders, to crowd in private investors. It will not be easy, but it can be done when it is backed up by a long-term SA energy transition plan that is just — by protecting the poor and vulnerable through a social energy plan. The energy plan should also commit the transmission SOC to procure from cheap renewable energy generators as part of SA’s commitment to the Paris Agreement on climate change.

SA should not default like Argentina, but has an opportunity to use the dire Eskom position to its advantage.

• Mondi is a senior lecturer in the Wits School of Economic and Business Sciences