Lowering SoE risk to fiscus requires governance and business-model reform - S&P

27th March 2018

By: Terence Creamer

Creamer Media Editor

     

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The risk posed to government’s fiscal position as a result of contingent liabilities linked to South Africa’s State-owned enterprises (SoEs) will be only partly alleviated by governance reforms, S&P Global Ratings warns, arguing that greater attention will also have to be given to reforming SoE business models.

Associate director Gardner Rusike says that, while S&P Global Ratings noted recent efforts to address governance problems, particularly at SoEs with weak balance sheets, such as Eskom, the contingent-liability risk had not only persisted, but had also increased.

When government’s total guarantees exposure was combined with government debt, the figure stood at 62.5% of gross domestic product, up from 60.4% in 2016 and 58.3% in 2015.

“It is important to sort out the governance issues, which is about the boards and the executive management. That is an important stating point,” Rusike told participants at S&P Global yearly conference in Johannesburg.

“But, more than that, there are still fundamental issues, which relate to the business models. So reforms at SoEs are still on-going and we look forward to more that can help with governance, as well as on the business model side.”

In an interview with Reuters, National Treasury director-general Dondo Mogajane indicated that government would consider selling stakes in certain SoEs, which were posing a threat to the country’s fiscal balances, citing South African Airways (SAA) and Eskom as examples.

Mogajane made reference to the prospect of splitting Eskom into separate generation, transmission and distribution entities in an effort to attract private entities.

Eskom acting CEO Phakamani Hadebe had also confirmed that, while Eskom’s capital structure was not sustainable in its current form, the utility was considering ways to strengthen its balance sheet in the absence of any injection from government. Eskom chairperson Jabu Mabuza indicated that “everything is on the table” as part of the capital-structure review, including possible asset disposals.

Likewise, SAA was considering various restructuring options, including the sale of a stake to a strategic equity partner, the sale of noncore assets and a merger with other government-owned airlines, as part of efforts to turn the lossmaking national carrier around.

However, there would be strong opposition to any attempt at privatisation, with various trade unions already opposing a greater role for independent power producers in the electricity supply industry. In addition, any proposal that could involve jobs cuts would be strongly opposed.

ESKOM IN FOCUS

In February, S&P Global Ratings downgraded Eskom’s long-term foreign and local currency corporate credit rating to an even lower ‘speculative grade’ of CCC+, from B- previously, while sustaining its negative outlook, owing to ongoing liquidity concerns.

In its review the ratings agency lowered, from  ‘very high’ to ‘high’, the assumed likelihood of “sufficient and timely” government support to address Eskom’s liquidity challenges.

Eskom described the timing as unfortunate in light of improved market sentiment toward the utility, while Hadebe said he was “comfortable” that government had provided tangible support to ensure that Eskom’s governance-related and liquidity challenges were resolved expeditiously.

However, S&P Global Ratings director Omega Collocott stressed that the key issue related to whether government’s support had been “sufficient and timely”.

She explained that while the prospect of government support for Eskom had previously been considered ‘extremely high’, this had subsequently been lowered to ‘very high’ and, most recently, to ‘high’, owing to a lack of evidence of “timely” action during a number of “crisis points” relating to Eskom’s cash-flow statement in recent times.

“The two recent downgrades, in November last year and February this year, had everything to do with liquidity and with the sufficiency and timeliness of government’s response to Eskom’s critical financial and liquidity challenges,” Collocott explained, noting that, from November, Eskom’s finances had been reduced to the point where it had less than six-months of cash holdings.

 She admitted that a few eyebrows had been raised, particularly with the February downgrade. “But we had Eskom running out of money, we had a State of the Nation Address and a Budget Speech, and [we are still] unclear how this issue is going to be resolved. There is a short-term liquidity bank-funded line in place, which runs out in August in 2018.”

Eskom’s Hadebe told lawmakers that the utility had raised R43-billion from the market and would finalise a comprehensive, integrated strategy for the entity by September.

“As of today, I’m happy to announce that Eskom has been able to raise in gross terms R43-billion from the market…in net terms we have raised borrowing of R33-billion,” he told Parliament’s Portfolio Committee on Energy.

“This indicates that the market, or fund managers and investors, are beginning to welcome Eskom back into the financial market. It also highlights that Eskom can begin to diversify its funding because it is attracting various investors.”

Despite the risks posed by the SoEs, S&P had revised its growth forecast for South Africa to 2% for 2018, from 1% previously and expects the economy to expand by 2.1% in 2019.

However, the agency still felt justified in having downgraded South Africa’s local currency debt to ‘junk’ in November.

Rusike said the country was on a better path, but that the measures taken in the February Budget were unlikely to ensure debt stabilisation unless South Africa grew even stronger. “Nevertheless, there are very good improvements and we are happy with them.”

Edited by Creamer Media Reporter

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