Bailouts for South Africa’s state-owned companies such as Eskom will weaken the nation’s fiscal position and put its last investment-grade credit rating at risk, the Reserve Bank said.
A downgrade by Moody’s Investors Service would leave South Africa without any investment-grade credit rating for the first time in 25 years. It would also see the country fall out of investment-grade debt gauges including the FTSE World Government Bond Index. This could trigger around $1.5bn (about R22bn) in forced outflows, the Reserve Bank said, citing International Monetary Fund estimates.
"The high level of the South African government’s contingent liabilities and the high probability of significant amounts of these contingent liabilities materialising, as well as Eskom’s current large debt levels, pose a threat to South Africa’s sovereign credit rating," the central bank said in its six-monthly Financial Stability Review released Wednesday in the capital, Pretoria.
The cash-strapped power utility accounts for more than half of the government’s R529.4bn guarantees to state companies, the central bank said, citing data from the National Treasury. Contingent liabilities are expected to increase to R1.02trn by 2020-21 from R879.6bn in 2018-19.
"The state of government finances and the sustainability of government debt in particular remains a risk to the stability of the South African financial system and is one of the main potential determinants of further sovereign credit-rating downgrades," the central bank said.
Debt at Eskom, which Goldman Sachs Group has called the biggest threat to South Africa’s economy, has ballooned to more than $30bn (about R440bn), and the company isn’t selling enough electricity to cover its operating and borrowing costs. The government granted the power company a three-year, R69bn bailout in February, but it had to ask for emergency funding last month to remain solvent.
Moody’s added Eskom guaranteed debt to that of the government, pushing the total state burden to more than 70% of gross domestic product over the next few years, higher than its similarly rated peers.
The ratings company has a stable outlook on its assessment of South Africa, meaning a full downgrade may not be imminent.
President Cyril Ramaphosa’s plan to split the utility into three separate entities, which faces opposition from labour unions who fear job losses, may be delayed by Phakamani Hadebe’s sudden decision to step down as chief executive officer. The newly elected president is expected to announce a funding and turnaround plan for Eskom, after appointing his cabinet Wednesday.