Thanks to Moody’s, Cyril gets a lucky breather to fix Eskom
He needs time to set the country right again, as he has promised he will do. Rating agency is prepared to wait
If President Cyril Ramaphosa didn’t already feel the weight of the entire country on his shoulders, he must surely feel it now.
SA’s investment grade credit rating by Moody’s is all that stands between us and a spiral of rising debt service costs, rising borrowing costs, decreased social spending and – as a result of all of those – increased social instability. We are lucky that Lucie Villa, Moody’s analyst for SA, didn’t see the need to pull the trigger.
Some economists, such as Sanlam Investments chief economist Arthur Kamp, argue convincingly that, in terms of the Moody’s methodology, not enough had changed to compel Moody’s to make a move, especially one that would set off a deeply negative chain of events.
So even though electricity supply constraints are back, debt and fiscal consolidation are not in sight and the growth outlook has deteriorated, in the big picture SA still looks able to pay its debts. With only 10% of government debt dollar denominated and deep and liquid domestic capital markets, SA is not vulnerable to what Moody’s describes as “event risk”, such as a sudden inability to service its debt.
This would have been key to Moody’s non-decision on Friday. Also important was the approach the national treasury took to Eskom. The announcement in the budget that the government will support Eskom with R23bn a year for the next decade has mitigated the financial risk and Moody’s would likely have looked on that form of support – annual capital injections rather than taking over the debt as the Eskom board had suggested – as favourable for SA’s credit outlook.
But in addition to these more objective factors, analysts across the board agree that a key reason why Moody’s didn’t move is Ramaphosa. He needs more time to set the country right again, as he has promised he will do. Moody’s is prepared to wait a bit longer to see if he can do it.
So what are the things that Ramaphosa is expected to do, and will he be able to do them? The list includes rebalancing public finances by reining in the wage bill; restructuring state-owned enterprises; and improving the environment for doing business by, for example, releasing broadband spectrum. Eskom, the biggest and most urgent problem, naturally tops this list.
As the biggest financial risk, Eskom is also the biggest risk to growth. Government financial support notwithstanding, that risk remains fully in play. The 2015 Budget Review – the last time the electricity supply was the top binding constraint on growth – estimated that electricity supply constraints could slash GDP growth by 1% a year.
The details of the plan to split Eskom and make it sustainable have not been shared with the SA public but would likely have been shared with Moody’s. The big question, though, is whether Ramaphosa can pull it off.
In and of itself, the splitting of Eskom into generation, transmission and distribution entities will not solve Eskom’s generation crisis. What can solve that crisis quickly is an acceleration in the process to bring new sources of power generation on to the grid. That is where the power of the split lies: in the creation of an independent system operator able to buy and use energy from a variety of sources.
This is clearly the unarticulated plan. But there is huge political opposition. The National Union of Metalworkers of SA (Numsa) has already said that increasing the number of independent power producers is tantamount to privatisation. While this is not strictly true, the reality is that liberalising the market by diluting Eskom’s monopoly does amount to a fundamental change in the nature of how electricity is provided in SA.
There is some hope that Ramaphosa can pull it off. There are several unions at Eskom. Apart from Numsa, the National Union of Mineworkers (NUM) also has a significant presence. NUM, which recently met Ramaphosa, has been shifting slowly, with signs that its leadership will consider striking a deal, provided it is attractive enough.
Even so, restructuring Eskom will require that Ramaphosa proceeds with huge determination. As Numsa resists, the NUM will be torn apart. Many of its members will want to follow the Numsa line, which squares so well with the deep mistrust built up (not without reason) between employees and bosses at Eskom. If Ramaphosa cannot make the deal with labour attractive enough the fight over Eskom will be the showdown of the democratic era.
He is in a difficult position. To avoid a downgrade he must reform Eskom. To avoid “event risk” – this time in the form of social instability – he must offer workers a substantial (and probably expensive) bargain that could undercut the effect of the reforms.
It is a heavy burden to shift around.