Eskom Extends South Africa Power Cuts as Moody's Flags Risk

(Bloomberg) -- South Africa’s debt-laden power utility raced to stabilize the grid this week by resorting to the most intense supply cuts in four years.

Eskom Holdings SOC Ltd. implemented blackouts for a third day on Tuesday, removing 3,000 megawatts from the system after so-called stage 4 rotational power cuts, or 4,000 megawatts, on Monday as it moved to avoid total collapse of the grid. The reductions come as Moody’s Investors Service said the producer is a significant risk to South Africa’s finances and President Cyril Ramaphosa’s strategy to split the company into three does little to address its problems.

“No modern economy can operate without power,” said Mike Schussler, an economist at economists.co.za. “If we had stage 4 load shedding every day, it would take away 10 percent of the power of the South African economy.” Eskom has about 40,000 megawatts of installed generating capacity.

The rand was the worst-performing major currency against the dollar Monday, while yields on benchmark government rand bonds rose the most since October. The rand gained 0.2 percent versus the dollar on Tuesday.

Credit-Negative

Providing Eskom, which has 419 billion rand ($30 billion) of debt, financial support before taking measures to generate savings at the utility would be credit-negative for the country, Moody’s said. The remedies would entail “unpopular decisions” on electricity tariffs, it said.

Eskom’s board held urgent talks with management and Public Enterprises Minister Pravin Gordhan on Monday, and called for an audit of the power system and an investigation on why new projects have been delayed, it said in a statement.

Medupi and Kusile, two new plants that will rank as among the world’s biggest coal-fired facilities, are years behind schedule and significantly over budget.

Power cuts may cost the country as much as 5 billion rand a day, according to the Organisation Undoing Tax Abuse, a civil-society group.

Regular supply interruptions are creating uncertainty that endangers businesses that are highly dependent on the utility, said Shaun Nel, a spokesman for the Energy Intensive Users Group of South Africa, whose members consume more than 40 percent of the nation’s power and include Anglo American Plc.

“We’re going to see companies close in the smelting industry,” Nel said. Between already-high tariffs and the specter of more supply cuts, the victims will be “small foundries and smelters that shut down and never come back,” he said.

The country is Africa’s biggest steel producer, and Eskom first throttles supply to industrial customers before cutting retail consumers.

Tariff Request

Eskom has asked for permission to raise power tariffs by 15 percent in each of the next three fiscal years, more than triple the average inflation rate over the past 12 months. If allowed, this would ease the government’s contingent-liability risk but stoke inflation and weigh on economic growth, said Moody’s. Small price increases would “maintain pressure on the company’s very weak financial profile,” it said.

A breakup into generation, distribution and transmission businesses will enable each unit to better manage costs and make it easier to raise funding, the government said. Credit-rating companies see Eskom as a key risk to Africa’s most-industrialized economy, with blackouts and huge debt a drag on growth prospects.

Moody’s is the only one of the three major ratings companies that has South African debt at investment grade. It raised the outlook on the assessment to stable from negative in March and will publish its next assessment on March 29, a month after the release of the 2019 budget.

Moody’s comments are a reminder that major structural issues such as power insufficiency are serious constraints on the real economy and put pressure on public finances, said Piotr Matys, London-based emerging markets currency strategist at Rabobank.

“Those issues pose a major challenge for President Ramaphosa’s administration,” he said.

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