Eskom; from irritability to dire economic threat

CAPE TOWN — Perhaps it was a metaphor; I had just drilled a hole to screw in the first of two supporting planks to a very rickety old table bearing an assortment of herbs and veggies on Sunday. Then Eskom cut the power for two hours. Irritating, but not as life-threatening as it will soon become to the small foundry and smelting businesses that helped produce the metal screws and table legs I was working with. The 15% annual tariff hikes that may accompany our increasingly unavoidable power cuts will claim the smaller of these businesses as its first victims. Next week’s budget and the reaction of credit agencies will tell us more, but when Moody’s says that government lending financial support before taking measures to generate Eskom savings will be credit-negative for the country, we stop exhaling. That’s because these remedies entail “unpopular decisions on electricity tariffs and/or additional cost-cutting that will require agreement from key stakeholders.” And therein lies the rub. Throwing everything but the kitchen sink at Eskom may yet give the lie to the popular maxim that it’s “too big to fail”. We’re all going to have to share increasing pain if we’re to create realistic hope, unions included. – Chris Bateman

By Colleen Goko, Paul Burkhardt and Prinesha Naidoo

(Bloomberg) – South Africa’s debt-laden, state-owned power utility, which intensified supply cuts that threaten businesses Monday, continues to represent a significant risk to the country’s finances and President Cyril Ramaphosa’s plan to split the company into three does little to address the producer’s problems, Moody’s Investors Service said.

Providing Eskom Holdings SOC Ltd. financial support before taking measures to generate savings at the utility would be credit-negative for the country, Moody’s said in an emailed report Monday. The remedies would entail “unpopular decisions on electricity tariffs and/or additional cost-cutting that would require agreement from key stakeholders,” it said.

Moody’s comments come as Eskom implemented so-called stage 4 rotational power cuts throughout the country on Monday. That involves taking 4,000 megawatts demand out of the system to prevent a complete collapse. While generation units have returned to service, others have continued to trip, according to the utility.

Economic cost

Power cuts may cost the country as much as R5bn ($364m) a day, according to the Organisation Undoing Tax Abuse, a civil-society group.

Regular supply interruptions are creating uncertainty that endangers businesses that are highly dependent on the utility, said Shaun Nel, a spokesman for the Energy Intensive Users Group of South Africa, whose members consume more than 40 percent of the nation’s power and include Anglo American Plc.

“We’re going to see companies close in the smelting industry,” Nel said. Between already-high tariffs and the spectre of more supply cuts, the victims will be “small foundries and smelters that shut down and never come back,” he said.

The country is Africa’s biggest steel producer, and Eskom first throttles supply to industrial customers before cutting retail consumers.

Tariff request

Eskom has asked for permission to raise power tariffs by 15% in each of the next three fiscal years, more than triple the average inflation rate over the past 12 months. If allowed, this would ease the government’s contingent-liability risk but stoke inflation and weigh on economic growth, said Moody’s. Small price increases would “maintain pressure on the company’s very weak financial profile,” it said.

Speaking in his state of the nation address last week, President Cyril Ramaphosa initiated a split of the state-owned electric company that is struggling under R419bn of debt and declining demand. A breakup into generation, distribution and transmission businesses will enable each unit to better manage costs and make it easier to raise funding. Credit-rating companies see Eskom as a key risk to Africa’s most-industrialised economy, with blackouts and huge debt a drag on growth prospects.

Moody’s is the only one of the three major ratings companies that has South African debt at investment grade. It raised the outlook on the assessment to stable from negative in March and will publish its next assessment on March 29, a month after the release of the 2019 budget. Finance Minister Tito Mboweni will announce a turnaround plan and rescue package for Eskom in the Feb. 20 speech, Ramaphosa said last week.

The rand erased earlier gains, weakening as much as 0.8% to 13.7269 per dollar by 12:52pm in Johannesburg. Yields on rand-denominated government bonds due December 2026 climbed 8 basis points to 8.73%, the highest this month.

Moody’s statement adds more negativity to South African markets on a day when dollar strength is hurting emerging-market currencies, said Matete Thulare, an analyst at FirstRand Bank Ltd.

“Markets will now wait for the budget on Feb. 20 to see what comments the agency has to make,” Thulare said.