Moody's Eskom Debt Inclusion Raises South Africa Downgrade Risk

(Bloomberg) -- The risk of South Africa losing its only investment-grade rating could increase now that Moody’s Investors Service has decided to include the state-owned power utility’s colossal debt load in the country’s overall fiscal-strength calculations.

Moody’s now includes Eskom’s government-guaranteed debt in its assessment of the nation’s fiscal situation because the utility can’t service its obligations without the state’s backing, it said in an emailed report Wednesday. The ratings company sees South Africa’s debt burden increasing to more than 70% of gross domestic product over the next few years, a trend that contrasts with Baa3-rated peers, which include Bahamas and Hungary, it said.

Key Insights

• South Africa’s foreign debt is already rated junk by S&P Global Ratings and Fitch Ratings, and retaining the investment-grade assessment at Moody’s depends on how the government approaches the fiscal deficit and financial troubles of state-owned companies after the election.
• The embattled South African state power utility’s debt burden, described by Goldman Sachs Group Inc. as the biggest threat to the nation’s economy, is approaching 500 billion rand ($35 billion), according to data compiled by Bloomberg from public records, including bonds and issued loans, up from about 370 billion rand a year ago.
• The Treasury’s worst-case scenario is for gross debt to deteriorate to 60.2% of GDP in the fiscal year ending February 2024; this doesn’t include Eskom’s debt.

To contact the reporters on this story: Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net;Ana Monteiro in Johannesburg at amonteiro4@bloomberg.net

To contact the editors responsible for this story: Benjamin Harvey at bharvey11@bloomberg.net, Rene Vollgraaff, Ana Monteiro

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