Moody’s sounds warning bells for SA after Eskom bailout

Moody’s Credit Ratings Agency yesterday sounded the warning bells for South Africa following Finance Minister Tito Mboweni’s multibillion-rand bailout for Eskom in a research report.

“In addition to annual capital support for Eskom of ZAR23 billion for fiscal 2019 (0.4% of GDP in fiscal 2019), which is already earmarked in the fiscal 2019 budget, as well as for the following two years, the special appropriation would provide additional support of ZAR26 billion in fiscal 2019 and ZAR33 billion in fiscal 2020,” Lucie Villa, Moody’s Vice President – Senior Credit Officer, wrote in her report.

“If passed, the additional support to ease the company’s financial pressures would be credit negative for South Africa because it would be an additional drain on fiscal resources.”

Villa noted Eskom’s lack of a strategy to wean it off the government teat was making the problem worse.

“When the budget was drafted, the government indicated that it could extend support to the company over the following seven years to provide ZAR230 billion in total,” Villa said, and warned of a widening of SA’s fiscal deficit over the next two years which would worsen the upward trend on government debt.

Unfortunately, the two boxes Moody’s would prefer were left unchecked, namely passing Mboweni’s special appropriation bill for Eskom, and no payback for the R230 billion, are well and truly ticked.

When Mboweni presented his bill on Tuesday, parliament passed it with no problem.

“The ANC in Parliament is pleased with the passing of the 2019 Appropriation Bill in the National Assembly (NA) today,” a statement from the Office of the ANC Chief Whip Pemmy Majodina stated.

“An amendment to the Appropriations Bill includes the Special Eskom Appropriations Bill, which is Minister of Finance’s authorisation of R17.652 billion to settle debt obligations for power utility Eskom, on 2 April, in terms of section 16 (1) of the PFMA, which deals with the use of funds in emergency situations,” Majodina noted.

Villa surmised government would try to absorb the extra cost with new revenue or expenditure measures in the next Medium-Term Budget Policy Statement (MTBPS), expected on 23 October, “but we think its room to maneuver is extremely constrained”.

“On the spending side, the government has already embedded in its original budget several containment measures, including related to the wage bill, making further restraint difficult,” Villa said.

“The 2019 budget had raised contingency reserves to ZAR13 billion (by ZAR6 billion) for fiscal 2019 and lowered those for fiscal 2020 to ZAR6 billion (by ZAR2 billion) to accommodate financial support requests from the broader state-owned enterprises, including South African Airways and Denel, leaving limited room to absorb Eskom’s additional support.”

Villa also warned weak tax performance – which Moboweni warned about – in the last fiscal year coupled with an expectation that economic growth would remain low at 1% in real terms in 2019 also left limited room for adjustment on the revenue side.

Coinciding with Mboweni’s bailout on Tuesday, the International Monetary Fund boosted Villa’s warnings by noting the “subdued pace” of growth was being exacerbated by “a larger-than-anticipated impact of strike activity and energy supply issues in mining and weak agricultural production”.

“Further balance sheet support under a debt transfer as requested by Eskom in December 2018 or off-balance sheet support such as a step-up in the ZAR350 [billion] guarantee envelope for Eskom debt, remain additional risks to South Africa’s fiscal strength,” Villa said.

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