Amid confirmation that Eskom is technically insolvent and will require a capital injection by April to remain a going concern, a leading economist is cautioning against the proposed transfer of R100-billion of the utility’s debt to government’s balance sheet.
Instead, Standard Bank chief economist Goolam Ballim is proposing that government commits to taking over some of Eskom’s debt-servicing costs for a period of two years to allow the utility space to implement a “credible turnaround plan”.
In his State of the Nation Address last week, President Cyril Ramaphosa announced that Eskom would be split into three independent businesses of generation, transmission and distribution and that government would also provide support to the debt-laden utility, which is expected to report a R20-billion loss for the 2018/19 financial year.
Finance Minister Tito Mboweni would release details of the support plan during his Budget speech on February 20, but Ramaphosa stressed that it would not burden the fiscus with “unmanageable debt”.
In a subsequent briefing, Public Enterprises Minister Pravin Gordhan stated that, at R420-billion, Eskom’s debt represented 15% of all sovereign debt and that a default would threaten the economy.
Ballim warned on Wednesday that transferring R100-billion from Eskom to the National Treasury would have implications well beyond that of raising government’s debt-servicing and debt-to-gross domestic product (GDP) ratios. It could even prompt an out-of-cycle downgrade announcement by Moody’s, he added.
Moody’s is currently the only credit rating agency to rate South Africa as investment grade, with S&P’s Global Ratings and Fitch Ratings having already downgraded South Africa to junk. Moody’s is scheduled to make its next rating decision on South Africa on March 29.
Ballim refused to divulge the full results of the bank’s internal modelling of the proposed transfer, owing to it not being included in the bank's base case for 2019 and because of the “dire” outcomes reflected therein.
Nevertheless, he indicated that such a move would result in material changes to the bank’s current assumptions regarding the trajectory of the country’s debt, fiscal balance, as well as its growth outlook. Standard Bank is currently forecasting growth of 1.3% for 2019, a fiscal deficit of 4% and a peak debt-to-GDP ratio of about 59%.
“It’s not just the case of adopting the nominal numbers and inserting those, there will be a higher finance charge,” he warned, adding that the proposed transfer made sustaining a sub-60% debt-to-GDP ratio difficult.
In addition, any downgrade by Moody’s would trigger at least $12-billion-worth of forced outflows, excluding any possible discretionary flows that could leave South Africa as a result of the sovereign being junked.
Funding higher debt levels could also further distort the shape of South Africa’s tax burden across the tax silos of value added tax (VAT), corporate tax and personal income tax.
This could have implications for whether Mboweni would be in a position to honour the commitment made during the October Medium-Term Budget Policy Statement of not further increasing the tax burden on households, which Ballim argued had become the “piggy bank” in recent years amid relatively flat VAT increases and a fall in corporate tax receipts.
“Personal income tax as a share of overall tax in the last 11 years leapt from 28% to 38%,” he highlighted. The figure would likely rise even further in the event that the National Treasury was compelled to fund that additional debt burden and debt-service costs out of taxes.
Instead, Ballim believes a middle-ground solution could lie in government taking over some of Eskom’s debt-servicing costs for a period of two years, which would allow the utility time to implement a “credible turnaround strategy”.
“I believe that would represent the path of least resistance: it maintains the sovereign, it doesn’t upset Moody’s in particular, as well as giving Eskom a medium-term lifeline.”