The major decision hanging over South Africa

It has been 200 days since South Africa was last hit by load shedding, and significant progress has been made in addressing operational challenges at Eskom.

This is according to minister of public enterprises, Pravin Gordhan, who was reporting during the Presidential Working Committee meeting on Monday (7 October).

Gordhan said that Eskom was reinforcing management skills at power stations by returning effective power station managers to positions from which they had been removed.

The embattled power utility is also appointing more operational engineers in spite of financial constraints.

Gordhan added that a special paper on Eskom and the roadmap to ensure its sustainability into the future was close to finalisation and would be announced shortly.

While the rebuilding of Eskom will be welcomed by South Africans who live in fear of further blackouts, the continued turnaround of the struggling state-owned power company is also vital for the country’s economy.

Credit rating worries

An investor poll by Bloomberg found that the country is likely to hold on to its sole investment-grade rating from Moody’s this year – however, analysts believe that it is crucial that the ratings agency approves of the proposed plans for Eskom.

A majority of those surveyed (64%) expect the country to stay out of junk territory in the assessment of Moody’s despite financial markets pricing in a downgrade for months.

Both the S&P Global Ratings and Fitch Ratings cut their assessments to junk in 2017.

Should Moody’s also downgrade South Africa to junk status, the country would no longer be eligible for inclusion in debt gauges such as Citigroup Inc’s World Government Bond Index (WGBI).

This would trigger a major outflow of money from the country estimated to be in the region of R100 billion.

In September, Moody’s senior analyst Lucie Villa said that the country currently has a stable economic outlook, strong institutions and reasonably good foreign currency reserves.

However, she cautioned that there are still issues surrounding power utility Eskom which is facing R440 billion in debt.

While the government has proposed splitting it into three units and a policy paper by the National Treasury proposes selling coal-fired power plants, no strategy to stabilise 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,” Villa said.

“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 it takes more than a few months to sort out certain issues.”

Running out of time 

While Gordhan has promised that a plan for Eskom will be released soon, some economists believe that the country is running out of time to implement its proposed reforms.

Finance Minister Tito Mboweni is due to deliver his mid-term budget policy statement on 30 October, and set out how massive bailouts for Eskom will be funded at a time when growth and tax revenue are falling short of target.

That’s just two days before Moody’s is set to make its decision on South Africa’s investment grade.

“We are really running out of time,” said Nedbank economist Isaac Matshego in an interview with Bloomberg.

“The number one priority for the government right now should be to stabilise the key state-owned enterprises, not only because they are failing operationally but also because they are a heavy burden on the fiscus.”

Read: 7 things that could see load shedding return in the next few months

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The major decision hanging over South Africa