Eskom timing could not be worse as Moody’s review looms

 ·20 Mar 2019

The timing of daily stage 4 load shedding could not come at a worse time, economists say, as ratings agency Moody’s prepares to review South Africa’s credit rating in the coming week.

Moody’s is currently the only major ratings agency that has South Africa at ‘investment grade’ – one notch above junk –  with a stable outlook.

S&P and Fitch both downgraded SA to junk status in 2018, in response to the surprise cabinet reshuffle and an unfavourable mid-term budget in October 2017.

According to PwC economist, Lullu Krugel, the latest bout of load shedding has come at the worst time, given its proximity to the Moody’s review, saying that the blackouts could push the agency to change the country’s outlook to negative – or to outright downgrade the country to full junk status.

Chief economist at Efficient Group, Dawie Roodt also believes that the chances are high that South Africa will be downgraded.

Roodt said that by his calculations, the South African economy would be 10% bigger than it is, if Eskom could work correctly.

“(Stage 4 load shedding) will have a knock-on effect on the current debt/GDP ratio which would mean that a Moody’s downgrade is likely,” he said.

Should South Africa be downgraded by Moody’s, it would push the country into full junk status (all three major ratings agencies having both local and foreign currency in sub-investment grade), which would force the country out of the Citi World Government Bond Index.

This would prompt asset managers and pension funds to sell billions of rands worth of domestic bonds. This would sharply increase the cost of debt and pressure the exchange rate.

Eskom is South Africa’s biggest risk

Eskom has long been the key point of concern for ratings agencies, Moody’s included, with the group’s mounting debt highlighted as the biggest risk to the entire country.

After finance minister Tito Mboweni promised a R69 billion bailout for the power utility, as well as an intent to restructure it and split it into three different companies, ratings agencies took a cautiously optimistic stance.

However, Moody’s said that the South African government would need to be a lot clearer on the conditions for the bailout, and deliver a more detailed plan for the splitting of Eskom for the benefit of the doubt to be given.

To date, this has not happened.

Instead, the national government has kept things vague – which in turn has led to push back from unions (who fear that job losses will follow the restructuring), and left room for political opponents to weave their own narratives around the power utility.

According to Intellidex analyst Peter Attard Montalto, while Moody’s has given South Africa the “extreme benefit of the doubt” in the past, based on the budget alone, an outlook change to negative is very likely – with a downgrade expected sometime this year.

PwC’s Krugel said that Moody’s has been “very kind” to keep South Africa above junk – but with days of stage 4 load shedding, no detailed plan on Eskom, and the knock-on effect this has on the economy, “our time has run out”, she said.

Read: Eskom’s problems are financial, structural and operational: chairman

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