S&P Global sees higher use of guarantees by Eskom as ratings ‘pressure point’

Ratings agency S&P Global warns that contingent liabilities associated with guarantees to State-owned companies (SoCs) such as Eskom have emerged as a “pressure point” for South Africa’s sovereign rating, which the agency currently has at one notch above junk, but with a negative outlook. The negative outlook reflects the potential adverse effects of persistently low growth on the public balance sheet and S&P Global expects to “resolve” South Africa’s outlook status during 2017, with publications scheduled for June and November. ADVERTISEMENT Associate director and sovereign ratings analyst Gardner Rusike says the combination of rising government debt and the higher utilisation of guarantees by Eskom and other SoCs has the potential, unless contained, to “impact negatively on the creditworthiness of the sovereign”. A guarantee is a commitment by government to take responsibility for a loan in the event of a default and is extended to enable SoCs access to funding that would otherwise be unavailable, or to borrow at rates that reflect lower risk premiums. The National Treasury reported in February that guarantees to public institutions are expected to increase by R7.8-billion, from R469.9-billion in 2015/16 to R477.7-billion in 2016/17. It added that Eskom was expected to use R43.6-billion of its guarantee in 2016/17 and R22-billion yearly over the subsequent three years. However, Rusike notes that there has been deterioration, between the 2016 and 2017 Budgets, in the utilisation of guarantees by Eskom, which grew at a faster pace than the National Treasury had initially assumed would be the case. He is particularly concerned that Eskom may need to draw more aggressively on guarantees in light of recent “negative tariff decisions” by the National Energy Regulator of South Africa (Nersa), as well as prevailing legal uncertainty about the electricity utility’s access to the Regulatory Clearing Account (RCA) to recoup revenue that has been incurred prudently outside of that approved in the tariff. On February 23, Nersa approved a 2.2% Eskom tariff increase for 2017/18 and reaffirmed that any over- or under-recovery could be dealt with through the RCA mechanism. However, it acknowledged that its ability to consider RCA applications had been affected by the Gauteng High Court’s August 16 ruling, which determined the most recent RCA adjustment to be “irrational, unfair and unlawful”. Nersa is appealing the judgment, and will refrain from adjudicating further RCA applications until legal certainty is established. Rusike tells Engineering News Online that he understands that various processes are under way to find a way to support Eskom in light of the current RCA uncertainty. “But the reality is that Eskom is under pressure and they are requiring more support from government . . . more than what government had actually budgeted for. It is hurting Eskom for now, but it could eventually hurt government’s balance sheet.” He notes, too, that in a number of other countries, including Mozambique recently, governments have been forced to step in an assume SoC obligation. “So it’s a pressure point for us when we combine government debt, which has been rising, with these contingent liabilities,” Rusike says. Government debt currently stands at R2.2-trillion, or 50.7 % of gross domestic product, while interest payments continue to rise. Interest payments in 2016/17 will be over R153-billion. Two other factors highlighted by S&P Global as possible triggers for a downgrade include a failure of growth and fiscal consolidation to improve in line with current expectations, and the risk that political interference weakens institutions. However, it could also revise South Africa’s outlook to ‘stable’ should policy implementation lead to an improvement in business confidence, which bolsters private investment and, in turn, leads to higher growth and improving fiscal dynamics.