Moody’s will announce its review of South Africa’s credit rating – if any – on Friday and with the recent spate of rolling blackouts, Eskom’s burgeoning debt, and a skittish economy, the review could go any which way.
“Given that Moody’s has given us so much leeway already relative to the other two major agencies, it’s hard to say whether they will continue that or not,” said Dr Sean Muller, senior lecturer at the University of Johannesburg’s School of Economics.
On March 1, Standard & Poor’s revised Eskom’s investment rating outlook from negative to stable with its long-term credit rating remaining at CCC+, Moody’s had Eskom at B2 – “Obligations rated B are considered speculative and are subject to high credit risk”.
Both Fitch and S&P have South Africa as junk status.
Muller said as far as he was aware, a downgrade should not lead to a calling in of Eskom loans.
“The main, immediate concern of many analysts is the implications for foreign investment in local currency bonds. A downgrade to sub-investment/junk by Moody’s would result in South Africa being removed from key bond investment indexes,” said Muller.
“Meaning that many institutional investors would be prohibited from buying our bonds. That in turn would lead to an outflow of investment. Some estimates suggest approximately R100 billion.”
Muller explained this this would have negative implications for government borrowing costs and broader effects on the currency, banks and state-owned enterprises.
“It is still unlikely to be as serious as an Eskom default, which the government is doing – and will continue to do – everything to avoid.”
At the beginning of March, a Moody’s advisory stated: “The [current] credit profile of South Africa (issuer rating Baa3) reflects the country’s “Moderate (+)” economic strength, balancing the economy’s relative large size and diversification against persistently slow growth due to weak business confidence and structural impediments; its “Moderate (+)” institutional strength based on the country’s track record of effective macroeconomic policy and adherence to the rule of law, but high-level corruption; its “Moderate (+)” fiscal strength reflecting rising liabilities, directly from the government or contingent from state-owned-enterprises, but low foreign exchange risk; and its “Low (+)” susceptibility to event risk driven by the domestic political risk.”
The ink had barely dried on the statement when Stage Four rolling blackouts began to hit on a regular basis thanks to breakdowns at plants, and plants running out of diesel after running the diesel generators hard to make up for the breakdowns.
As Eskom has stated previously, the diesel generators were never meant to operate as base load plants, and they have used a prodigious amount of fuel.
In 2018, Eskom sent R200 million up in fumes burning diesel, and up to R100 million a day recently. The full figures will be known today.
In February, Eskom managed to raise a R15 billion credit with a consortium of local and international banks which according to Treasury General Manager Andre Pillay would ensure “that Eskom’s liquidity requirements are timeously fulfilled”.
Pillay noted that approximately 95% of the R72 billion funding requirement for 2018/19 had been secured, and that the “stable liquidity position places us in a position to focus on securing funding for the next financial year … of which 30% has already been secured.”
All of which plays into Moody’s review which may not be changed or even upgraded, which would give South Africa much needed breathing space..
“Eskom is a major consideration in two respects,” Muller noted.
“Its financial status has direct consequence for the main government budget – as we have seen in the 2019 Budget and its operational problems have direct implications for the economy, meaning growth and therefore also revenue collection.”