Since Finance Minister Enoch Godongwana announced last year that the government would relieve Eskom of a large portion of its debt, markets have been on the edge of their seats waiting for more detail. (Getty)
Since Finance Minister Enoch Godongwana announced last year that the government would relieve Eskom of a large portion of its debt, markets have been on the edge of their seats waiting for more detail.
That detail was expected to be divulged next week, when Godongwana is set to deliver his 2023 budget. However, markets could be in for disappointment, with some analysts saying they no longer expect the minister to unveil a full Eskom debt deal.
“The market was looking for some big announcement on Eskom’s debt restructuring. But what we are hearing in the market is that we might actually be disappointed because they haven’t actually come to a conclusion on how the debt issue is going to be resolved,” Momentum Investments economist Sanisha Packirisamy said.
“I think that might potentially be a disappointing issue for markets, if we don’t get much new information on that front. In October, everyone was waiting for it and they disappointed by not giving much information. So, they’ve set expectations quite high for the February budget.”
In his medium-term budget policy statement, delivered last October, Godongwana announced that the government would take over between one-third and two-thirds of Eskom’s debt. The utility’s breathtaking R400 billion debt has hamstrung its ability to maintain its ageing coal fleet, which has fed into the country’s 15-year energy crisis.
“Eskom is the biggest known risk to the economy and the public finances,” Godongwana said.
“A lower debt burden will enable Eskom to implement a viable unbundling process and make resources available for investment in critical electricity supply and transmission infrastructure.”
The impact of Eskom’s decline has become particularly acute in recent months, as persistent and high levels of load-shedding threaten to obliterate growth. Last month, the South African Reserve Bank’s monetary policy committee had a dire prognosis for the country’s crisis-hit economy, forecasting that GDP would grow by a mere 0.3% in 2023.
The government, the policy statement noted, would apply strict conditions to Eskom’s proposed debt relief. These conditions include the timeous execution of measures to address the sustainability of the utility’s newly unbundled businesses.
Earlier this week, ratings agency Fitch noted that low growth potential — largely the result of the energy crisis, as well as other problems with state-owned infrastructure — is a key credit profile weakness for South Africa.
“Should infrastructure problems cause a further decline in potential growth, that could eventually weigh on the sovereign rating,” Fitch said.
“We stated in November that a further weakening of trend growth or a sustained shock that further undermines fiscal consolidation efforts and raises socioeconomic pressures could result in negative rating action.”
Peter Worthington, senior economist at Absa Corporate and Investment Banking, was on the same page about a potentially disappointing announcement about Eskom.
“We do not expect a full Eskom debt deal to be unveiled and implemented at the budget next week because of its complexity and Eskom’s apparent lack of progress on the NT’s [national treasury’s] conditions for granting big debt relief,” he said in a research note.
For example, Worthington noted, Eskom seems to have made no headway on lowering its internal cost base and its hands seem to be tied in terms of meeting the treasury’s demand that it resolve the problem of growing municipal debt.
Moreover, it seems to be proving difficult to secure creditor consent for a formal debt exchange, he added.
“An easier approach would be for the NT to allocate additional funds to Eskom to cover some portion of Eskom’s debt servicing obligations but the amount of relief actually needed is contingent on actions that Eskom is yet to take.”
Worthington pointed out that President Cyril Ramaphosa’s comment during his State of the Nation address — when he said the treasury “is finalising a solution to Eskom’s R400 billion debt burden in a manner that is equitable and fair to all stakeholders” — seems to confirm that the final solution would not be presented in the budget.
Because Godongwana promised at the medium-term budget speech that a solution would be unveiled at the February budget, “we believe the government will have to provide some further details on the likely approach to avoid disappointing the market”, he added.
Off the back of the debt takeover announcement, Moody’s upgraded Eskom’s outlook to positive in its ratings action last October.
“The positive outlook recognises the commitment to address Eskom’s unsustainable capital structure. A partial debt transfer to the government will improve the company’s balance sheet and reduce pressure on cash flows through lower interest payments,” Moody’s said.
“Nevertheless, details are lacking as to the exact scope of the transaction and there are risks to execution, given Eskom’s complex capital structure.”
A partial debt transfer will be complex, Moody’s noted, and will require careful management given the diverse creditor base and varying provisions across the debt documentation. Under the majority of Eskom’s debt agreements, transfer of debt to a new borrower would require creditors’ consent, the ratings agency pointed out.
“More generally, the terms of the debt agreements may need to be fundamentally changed, if the government were to become a borrower, given that different representations, warranties and obligations may be required in this context. Therefore, further clarity on the details of any debt relief solution will be key for creditors.”
Other than Eskom, a major focus of next week’s budget speech will be how the government intends to support households in the wake of the ongoing cost of living crisis. Though prices are generally on the decline, as evidenced in inflation data released this week, food prices hit a 14-year high — probably the result of the lagged effects of the rand’s recent weakness, as well as load-shedding ramping up input costs.
In his State of the Nation address, Ramaphosa indicated the social relief of distress (SRD) grant would continue and that the government would ensure that existing social grants are increased to cushion the poor against rising inflation. The treasury, the president added, is also considering the feasibility of urgent measures to mitigate the impact of load-shedding on food prices.
The Bureau for Economic Research noted this week that, in October, the treasury budgeted for a 2.3% rise in total expenditure on social grants in the 2023-2024 financial year.
This was set to decline by about 10% in 2024-2025 as the SRD grant — which was extended to March 2024 — was assumed to fall away and then to increase by 4.5% in 2025/26.
Assuming grant expenditure increases by 5.5% in 2023-24 (in line with consensus expectations for headline inflation in 2023), and 4.5% in the following two fiscal years, social grant outlays over the next three fiscal years will be roughly R100 billion more than
set out in October’s medium-term budget, according to the bureau.
This will more than consume the R89 billion unallocated expenditure reserve in 2025-26, it pointed out.
On load-shedding relief, Worthington noted that it is unclear what the modalities and magnitude of the aid will be.
The support package, he said, will probably focus on accelerated tax depreciation allowances to encourage solar installations — and possibly other back-up forms of
electricity generation. But it is possible that the budget could go further, Worthington said, perhaps with a rebate for businesses that are buying diesel for generation.
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