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South Africa’s load shedding woes add to the country’s existing problems that include structurally weak growth, weak municipal and state-owned enterprise (SOE) governance and a lack of infrastructure network investment.
According to Moody’s latest credit conditions report on South Africa, that is currently rated at Ba2 stable, the country faces an unprecedented energy crisis as rolling blackouts has caused significant disruption, reduced business confidence and increased labour market uncertainty that add to existing problems.
Benedicte Andries, AVP-Analyst/CSR at Moody’s says if government’s proposed three-pronged approach to tackle the energy crisis in South Africa is implemented effectively, these plans will likely improve liquidity and reduce funding risk in South Africa, while the Eskom debt relief plan will reduce the utility’s debt levels and strengthen its cash flow.
“However, implementation risks are high and failure would perpetuate the economic harm of load shedding and bad governance and short-term debt relief alone cannot address the many problems Eskom faces, including poor operational performance which will take years to address.”
She says if municipalities cannot get up to date with payments to Eskom, government will have to decide whether to bypass them as service charge collectors and this will lead to a slump in municipalities’ revenues.
“More broadly, if the proposed plans for Eskom, municipalities and electricity market reform are unsuccessful, power cuts will continue to hurt the economy.”
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Andries says Eskom’s load shedding creates significant problems for economic growth and companies’ ability to repay debt.
If this remains unresolved, the situation will continue to hurt the loan book quality of DFIs and domestic banks which lend to public-sector entities.
“Some SOEs rely on discretionary financial transfers from government to meet their debt servicing obligations and on government guarantees to issue debt.
“This directly weakens the government’s balance sheet if these guarantees are called and indirectly as contingent liabilities. Conversely, improved liquidity and lower funding risks would reduce risks across the system.”
A more secure electricity supply would benefit municipalities’ revenue from electricity charges, Andries says and believes that if implemented effectively, the plan would help to protect the South African economy from the impact of load shedding.
“While government plans to use some of its fiscal reserves to fund Eskom’s debt relief, it will also need to borrow more. If the plan is successful, the government will potentially no longer have to budget annual capital transfers to Eskom.
“The reduction in the stock of guarantees following Eskom’s debt relief will narrow the gap between our debt numbers and the government’s during the next three years.”
Moody’s believes that the successful implementation of the debt relief plan will also have a positive effect on the Development Bank as well as the commercial banks.
“Successful implementation of municipalities’ revenue management will also be positive for their credit quality, reduce Eskom’s nonpayment risk and enhance banks’ asset quality,” Andries says.
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The municipal debt relief is credit positive for the municipalities and given the conditions attached, writing off their arrears to Eskom would mean that municipalities address their revenue management weaknesses, which in turn would allow them to restore their current accounts, pay other creditors and provide a reliable basic level of services.”
Moody’s says increased private investment in renewables would help protect companies from the impact of load shedding, reduce their operating costs as well as their greenhouse gas (GHG) emissions.
“Electricity sector liberalisation would help companies’ plans to invest in alternative, cleaner electricity sources and improve their exposure to carbon transition risk. The electricity sector reform aims to guide new generation capacity investments and promote energy efficiency. New capacity growth would ease system pressure in the medium term.”
She points out that so far new power plant construction has been subject to delays and growth in renewables has been slow.
“However, changes to the licensing process and the Just Energy Transition (JET) Partnership funding have the potential to unlock investment in new capacity over time. A significant step-up in renewable capacity will require Eskom to increase transmission grid investment, which may be difficult.”
Moody’s says finalising the Electricity Regulation Amendment Bill will expedite broader reforms to establish a competitive electricity market and enable private investment.
“The legislative reform, which supports the ongoing restructuring of Eskom and the new independent transmissions system operator, will enable the emergence of a competitive electricity market.”
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Increased private investment in renewables will help protect companies from the impact of load shedding.
According to the Minerals Council South Africa, the country’s mining sector, including smelters and refineries, consume about 30% of Eskom’s output.
“Although companies manage short and infrequent energy cuts by stockpiling and rescheduling energy-intensive processes to off-peak periods, higher and sustained levels of curtailment hurt production, especially processing capacity and shaft operations.”
According to Sibanye Stillwater Limited (Ba2 positive), production losses could total 15% in 2023, equal to 118 000 ounces of the upper end of its gold production forecast and 270 000 ounces of forecast platinum group metals (PGMs). Anglo American Platinum said power rationing in South Africa could reduce its refined PGM sales forecast by 5%.
Moody’s warns that a successful increase in renewable energy generation will depend on significant investment to increase grid capacity and stability, in particular to support growing renewable energy generation.
However, Andries says, Eskom’s ability to complete renewable projects will remain hampered, including by limited local supply chains.
“This poses a material challenge to the speed at which any improvements can be achieved. Over time, the establishment of the National Transmission Company of South Africa (NTCSA) will enable an independent market to start trading.”
She says ultimately, if the plans are unsuccessful, the corrosive effect of load shedding will continue to curtail companies’ productivity, which will in turn curb employment, consumer sentiment and deter much-needed investment.
“Frequent load shedding will also further weaken domestic banks. Blackouts reduce corporate borrowers’ repayment capacity, which will potentially increase banks’ nonperforming loans and loan-loss provisioning needs.
“The economic impact of subdued growth and high fiscal challenges will also curb the sovereign’s and banks’ creditworthiness, given the high links between the two.”
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