The National Treasury could possibly take over at least half of Eskom’s R400 billion debt, but this could come at a cost to the fiscus, which may threaten the country’s already weak credit rating status.
This was one of the big assumptions made by Absa Bank economists in their Quarterly Perspectives for the third quarter in a presentation yesterday.
Finance Minister Enoch Godongwana is set to unveil a solution for Eskom’s unsustainable debt during his Medium Term Budget Policy Statement (MTBPS) in October.
Absa senior economist Peter Worthington yesterday said they believed this could entail the transfer of a portion of Eskom’s debt onto the National Treasury’s balance sheet in the next fiscal year.
However, Worthington said they had not embedded this scenario into their forecast given all the uncertainties about the way forward on the Eskom debt burden issue.
“Everyone is being super tight-lipped about what that looks like, so we really don’t have a very clear view. But it would seem highly likely that a significant chunk of Eskom’s debt gets migrated onto the Treasury’s balance sheet,” Worthington said.
“It need not necessarily raise costs because to the extent that some of that debt gets transferred onto the Treasury’s balance sheet, the Treasury will need to pay less in those annual transfers to Eskom.
“But it might. It really depends how much debt is migrated (and) with what interest rates. It depends on the modalities of the package.”
South Africa’s sovereign debt burden currently stands at R4.35 trillion, or around 70 percent of GDP, with debt-service costs averaging R330bn annually.
Earlier this month, Eskom’s chief executive Andre de Ruyter said the struggling power utility would only be sustainable if its debt was reduced to R200bn.
The Treasury has reportedly started a process to hire a legal firm to advise it on how to reorganise Eskom’s debt.
This came after the International Monetary Fund (IMF) in June advised the government to “downsize Eskom’s balance sheet and restore its commercial sustainability”.
The Treasury has been reluctant to take Eskom debt onto the sovereign balance sheet, fearing that it would trigger a credit ratings crisis, but has continued providing it with annual cash transfers to cover debt costs.
The issue of Eskom debt is a highly controversial one that has been raging for some time. Last year a proposed plan that the Public Investment Corporation convert its debt into equity to help ease the power utility's debt burden was shot down amid a vehement opposition.
To date, Eskom has been provided with R136bn to pay off its debt with a further R88bn until 2025/26.
However, Worthington said ratings agency analysts would recognise that Eskom’s debt has actually been part of the sovereign’s problem for a long time.
He said the transfer of this debt to the sovereign did not suddenly motivate a much more concerned credit outlook because actually it would be in the direction of solving it.
“The government is currently transferring R23 or R20bn a year to Eskom. Money is fungible. Some of that is obviously being used to service Eskom’s debt,” Worthington said.
“If that debt now shows up on the Treasury’s balance sheet, I think they can maybe cut some of those transfers.
“But exactly where it comes out, we really won’t know until Godongwana gives his speech late October and we see what the debt solution looks like.”
However, economic policy research and advocacy group Firstsource Money said transferring Eskom’s debt to the National Treasury would not be a sustainable solution.
Firstsource Money executive director Redge Nkosi said if this move were to go ahead, it would open the channels for the private sector to get into Eskom via the back door.
“The government is unbundling Eskom, which essentially means the private sector will be involved in that. The private sector doesn’t want to assume such large debt, so essentially they want to get Eskom on a platter,” Nkosi said.
“The consequences of this would be to downgrade South Africa further into junk status, and the yield on government bonds will likely go up, which means the government has to borrow again at a higher rate and accumulate more debt.”
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