Moody’s Sees No Quick Fix for South African Power Utility Eskom

(Bloomberg) --

Fixing South Africa’s loss-making power utility Eskom Holdings SOC Ltd. is complex and it will take time for the government and the company to agree to a turnaround plan, according to Moody’s Investors Service.

The energy firm, which supplies about 95% of the country’s power, has 450 billion rand ($30.5 billion) of debt and is surviving on state bailouts after massive cost overruns at two partially completed coal-fired power plants. While the government has proposed splitting it into three units and a policy paper by the National Treasury proposes selling coal-fired plants, no strategy to stabilize its finances has been published yet.

“For us, there will be only one plan and that will be the one that both the government and the company agreed to,” Lucie Villa, Moody’s vice president and lead sovereign analyst for South Africa, said in an interview in Johannesburg on Monday. “Knowing the complexity of the issue, we know first that it will be an iterative process and that it takes time. So our view has been that is takes more than a few months to sort out certain issues.”

The government’s proposed 128 billion rand in assistance over three years will add to state liabilities and widen the fiscal deficit, she said, without giving an estimate.

Public Enterprises Minister Pravin Gordhan said President Cyril Ramaphosa is expected to release a policy paper on Eskom later this month and that the utility would be in very different shape a few years from now.

“We are going make sure that this project succeeds,” he told lawmakers in Cape Town on Tuesday. “We are in a period of recovery.”

Jabu Mabuza, Eskom’s chairman and acting chief executive officer, told lawmakers the utility found itself in the untenable position of having to borrow to service its debt. While Eskom’s operating costs had surged over the past five years, its revenue had remained flat with demand for power decreasing from the mining and residential clients who were increasingly moving off grid, he said.

“Our borrowings have increased to a level that are not sustainable,” and the utility’s problems cannot be fixed through cost cuts alone, Mabuza said. “We also have not been able to get a fair return on our assets.”

Downgrade Risk

Moody’s is the only major ratings company that still assesses South Africa’s debt at investment grade. While it has a stable outlook on the Baa3 rating, one level above junk, analysts are speculating that it’s at risk of a downgrade given weak economic growth and rising debt.

A downgrade would leave South Africa without any investment-grade credit rating for the first time in 25 years. It would also see the country fall out of key bond indexes including the FTSE World Government Bond Index, prompting outflows.

While Moody’s hasn’t published new forecasts for South Africa, it has said failure to implement policies to narrow the budget gap could push debt, including guarantees to Eskom, to above 70% of gross domestic product in the “medium term.”

Moody’s will be able to better judge South Africa’s outlook once the long-term plan for Eskom is known, Villa said. The company is looking for a balance between credible fiscal and debt numbers and detail on policy decisions in the medium-term budget statement, she said.

Finance Minister Tito Mboweni is due to present the mid-term budget in late October, just weeks before Moody’s is scheduled to publish its next assessment on Nov 1.

While South Africa’s economic and fiscal strength is eroding, it has credible institutions and a robust macroeconomic policy framework, Villa said.

“We think the institutions are well equipped to address that deterioration and to arrest it” and the new administration has the political will to implement policies, she said.

--With assistance from Mike Cohen.

To contact the reporter on this story: Prinesha Naidoo in Johannesburg at pnaidoo7@bloomberg.net

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Gordon Bell, John Viljoen

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