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South Africa has a sovereign debt problem. Its name is Eskom

‘We are facing an extremely serious financial situation’ – Mboweni.

A financial crisis confronting South Africa’s state power utility has become a national debt problem.

Finance minister Tito Mboweni Tuesday unveiled a second multi-billion dollar bailout for Eskom within five months, aid that may force the cash-strapped government to increase borrowing and taxes. That could in turn trigger a credit-rating downgrade and massive outflow of funds, raise the cost of new debt and stymie efforts to revive the moribund economy.

Read: Sarb gives, finance minister takes

“At the end of the day, short-term capital injections into Eskom don’t address its balance sheet issues and there’s still no sign of a turnaround strategy,” said Jeffrey Schultz, senior economist at BNP Paribas South Africa. “It is what it is — South Africa has to take in on the chin.”

The R59 billion cash injection into Eskom over the next two years should help the utility keep a lid on its R440 billion debt pile and remain solvent, especially when combined with an earlier three-year, R69-billion bailout. But the money probably won’t be enough to wean it off state support: The utility’s old plants are losing money and struggling to produce enough power to meet demand.

Read: Government allocates extra R59bn for cash-strapped Eskom 

Further details of a government task team turnaround plan, which includes splitting it into generation, transmission and distribution units under a state holding company, remain under wraps. The board also has to name a new chief executive officer to replace Phakamani Hadebe, who will leave at the end of the month, while the appointment of a chief restructuring officer is imminent.

“We are facing an extremely serious financial situation,” Mboweni told lawmakers in Cape Town. “Eskom is not financially sustainable based on its current high levels of debt and its inability to generate sufficient revenue to meet its operational and capital obligations, which exposes the entity to high levels of liquidity and balance sheet risks.”

The rand weakened after Mboweni’s comments, declining as much as 0.6% to 13.94 against the dollar on Tuesday before paring losses, while yields on government bonds due 2030 climbed the most in six weeks. Eskom produces about 95% of South Africa’s power, and the government has said it’s too big and important to fail.

Bailout boost

The difficulty the government faces in coming up with the money for Eskom may be compounded by tax revenue falling short of what was anticipated at the time of the February budget. The fiscal deficit for this year was projected to be the highest in a decade before the extra funding was accounted for and public debt was projected to stabilise at 60.2% of gross domestic product in 2023-24.

Morgan Stanley analyst Andrea Masia sees the budget gap widening to about 6.4% of GDP in the current fiscal year and 6.6% in 2020-21 as a result of the additional bailout. The February budget projected a gap of 4.5% and 4.3% for the two years respectively, but the country’s growth prospects have deteriorated significantly since then.

‘Wider deficit’

“Additional support for Eskom comes at the price of a wider fiscal deficit and larger debt burden, exacerbating an already challenging fiscal backdrop,” Masia said in a report. “In the end it’s the taxpayer that foots the bill.”

Eskom’s woes and the knock-on effect they have had on South Africa’s finances have soured Aberdeen Asset Management’s appetite for the country’s debt.

“We just have our risk chips elsewhere,” said Edwin Gutierrez, the London-based money manager’s head of emerging market sovereign debt. “It’s a bit too early to call it a sovereign-debt crisis. But yes, debt continues to march in the wrong way.”

About 62% of Eskom’s total debt is guaranteed by South Africa’s government. Moody’s Investors Service, the only major ratings company that still classifies South Africa as investment-grade, includes all that debt in its assessment of the nation’s fiscal situation on the grounds that the utility can’t service its obligations without state backing.

Worse debt burden

South Africa’s ability to avoid ratings downgrades will depend on it formulating a well-coordinated rescue for Eskom that will address its financial and operational deficiencies, according to Schultz of BNP Paribas.

“I cannot see how rating agencies can turn a blind eye to something like this given the extent of the deterioration we’re going to see in debt and deficit metrics,” he said.

© 2019 Bloomberg L.P.

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Why only appoint one restructuring officer… the Eskom problem needs much more attention.

Appoint some of the best talent available in the energy sector (local and international) and reward then with huge bonuses (R100m plus) is they can turnaround Eskom….

Pumping more and more money into Eksdom is like borrowing more and more money to buy oil if your car’s engine is shot. Eksdom needs to be drastically restructured. It needs to be broken up into manageable chunks. Its grossly overpaid and grossly bloated workforce needs to be halved. Of course, the unions, who, along with the Guptas and state capturers are the main cause of SA’s economic woes, will cry blue murder, but it’s either that or economic ruin. I’m not putting my money on the ANC facing down the unions, though.

Most South Africans are now WELL AWARE of the Eskom debt problem. We arte keenly aware of the financial ramifications on the state (SA taxpayer), etc.

Let’s do an article where we are ahead of the curve, instead of dissecting the problem. We know what the problem is.
WHAT NEXT? HOW WILL SA pan out? And how to avoid (most) of this financial fallout? Emigration? Pay your CGT exit tax & become a tax resident of another country? We need some scenario planners, or simply study history of other countries that went through same cash crunch. (Greece, Zim, Brazil, Argentina, Cyprus, Venezuela, more?)

Clearly the BEE social experiment is facing existence problems. Remember many said decades ago “no economy can survive that”. Well soon learn how SA survives that…

Eskom (read BEE/AA) will last until the last penny of national savings are used up, and also SARB reserves. No Eskom. Then it will be BLACK (at night) and DEAD at day.

(maybe give time for homes/businesses to convert to solar over the next few years, and then Eskom can die. Most of Eskom elect engineers would have their own alternative energy businesses going by then.)

Solutions:
(a) DO AWAY with the RDP housing program immediately.
(b) CUT SASSA pensions in half & DO AWAY with child grants! (tax each child instead)
(c) CLOSE SAA down (…besides my Comair shares needs a boost!)
Close other SOE’s not adding value to SA.
(d) If none of the above…..tax revolt??

By the numbers:

2.1 mil taxpayers: pay 80% of the Income tax
40% : Income tax % of total SA tax revenue
R440 bil: Eskom debt to be bailed out and growing

440bil x 0.4 x 0.8 / 2.2 mil = R64,000 per taxpayer

Eskom alone has sent each taxpayer a bill for R64,000. Now add on the other SOE’s and you’ve clocked up > R100,000 bill for the privilege of being under ANC rule.

The quicker taxpayers flee SA, the bigger your bill. Run for the hills.

Agree with some of your sentiments but cutting down on the meagre social benefits to the poor will not help. The child grant is meant that children do not starve. There is a common misconception that the SA social grant scheme is akin to the “dole” in the UK, that is wrong. Social grants only goes to penioners(R1700) and children (R430 per child). It is not unemployment benefits. I really would rather pay this than seeing the elderly and children suffer. In any civilised country with the possible exception of the US some form of a social safety net is the norm.

I understand that the SA situation is different and believ me I understand that the current tax base is too narrow, but cutting social benefits is a recipe for disaster and I think is rather callous to tell a 70 year old gogo to hal;ve her expenses…

Indeed, Notwarren. When one looks through a ‘micro’ glass one realises the misery of our 70 yr old gogo, as described.

When looking through a “macro” glass, what caused the misery? Poor political leadership is one.
Returning to gogo, I think we need to do a comparison of other old age pensioners (say in Zim? or elsewhere) to see how much other needy citizens receive on rest of African continent as a state-pension. Many in Africa receives nowhere near what our SASSA pays, hence coming across the border into SA remains an attractive proposition.

Our SA gogo I think is fortunate. In many other countries on the continent, that’s way past the general life expectancy. Locals are fortunate (yet do not realise it).

The average poor & destitute South African living in informal areas, have on average more assets (RDP house) than their extremely poor Indian compatriote on the mainland. Real poverty you’ll find in India. (and yes, I know, they do not deserve that. No one does.)

SA has an ANC problem.

“SA must decide if it wants a western, industrialised economy OR the ANC. It cannot have both.” (RW Johnson – How Long Will SA Survive The Looming Crisis)

The ANC’s problem is its voters: they want to remain poor and be handcuffed. (see well-written article below, by an educated African gentleman)

https://www.dailymaverick.co.za/article/2019-07-21-the-government-handcuffs-that-keep-africa-shackled-to-poverty/

The ANC just abuse the ignorant voters for perpetual corruption.

Its not a matter of if, but when we need the IMF bailout.

Hard to believe this is the same crowd that thinks SA should have a sovereign wealth fund. Not sure where they think the money will come from.

Maybe its not hard to believe as they surly think the taxpayer must pay for it.

Getting sick of this mentality.

The Government of the past 25 years has stolen taxpayers money and bankrupt RSA. This has been proven by the annual AG Reports …. no need to consider any other Report.

Now, 59 billion to Eskom….. RSA is doomed while these politicians run RSA. The ONLY way to solve this problem is to STOP paying any form of taxes until the Government can achieve an clear audit from the AG.

This money is gone-down the drain to pay for a hopelessly overpaid workforce.
SA taxpayer paying for this-VAT going to 20% soon.

Some commentators may recall I memntioned Eskom’s R500Bn debt is roughly the cost equilvalent of SEVEN US Navy Aircraft Carriers. (…that makes SA a wealthy country).

It gives one an idea how much the cadres have STOLEN the past few decades. Much of the debt problem came after 2008. More money has flowed the last few decades not only to the connected elite, but the broader society, that it’s likely collectively more than what the ‘priviledged’ minority socalled ‘stolen’ during apartheid.

As a taxpayer in SA I will not accept this nonsense about a sovereign debt risk / leading to default:

SA currently does NOT have international sanctions against it (as during apartheid), where the taps of global finance was turned off, and the SA Army came to a grinding halt in Angola 1989 because of lack of funds / country on edge of default.

What’s the useless govt’s excuse now???? We are able to trade with the whole world & we are supposedly free! What’s the problem ANC?

(…I fear many taxpayers will emigrate or simply flee without even paying their CGT ‘exit tax’) The remaining fewer taxpayers WILL NOT be able to carry the increasing burden….sorry, ANC…just default on the national debt…it’s the best you can do.

C’mon, taxpaying South Africans, be realistic. Fund the ANC’s dreams!

How about getting “your people” to pay their bills and stop stealing electricity, mboweni?

Thank you Michael from Klerksdorp. De story about Africa in Daily Maverick is telling the truth.
Have had a business in Kenya for 10 years and people are greedy to work for 2 euros a day. [for 9 hours]
In Ethiopia it’s half a euro per day. So South Africa has to go a long way down the gutter to reach that.
And i am sure we are going that direction. We are going to join the rest of the continents politics.

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