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Eskom reform is key to avoiding Moody’s South Africa downgrade, Afreximbank says

By David Whitehouse
Posted on Monday, 2 September 2019 11:46

Years of neglect and bad management have brought Eskom to its knees. REUTERS/Siphiwe Sibeko

South Africa still has the chance to avoid a Moody’s downgrade if progress made at state electricity utility Eskom continues, says Hippolyte Fofack, chief economist at the African Export-Import Bank (Afreximbank).

There is nothing inevitable about the long-anticipated loss of the country’s last remaining investment-grade rating, he argues. The country debt’s profile is still favourable as the average maturity of central government debt and low foreign currency content militate against refinancing and foreign exchange risks.

Fofack says that that there have been instances where a downgrade of a country by two of the main ratings agencies did not necessarily lead to the third following suit within two years.

  • “This divergence has happened in countries with strong growth potential and commitment to economic reforms,” he says.

The overhaul at Eskom will go a long way in determining the country’s fate.

Successful reform of the power sector “could have the combined effect of containing the rise of public expenditure outlays and expanding government revenues to narrow fiscal deficits in a context of growth acceleration,” Fofack says.

Progress at Eskom has already been made, Fofack argues:

  • Although unplanned outages are still happening, load shedding and improving plant maintenance are happening less often.
  • There has been significant improvement in plant performance and the recovery of diesel tank levels at the open cycle gas turbines.
  • Better management of dam levels at pumped-storage schemes is another area of progress.
  • Much still remains to be done. Increased energy supply reliability to households and corporates is needed, especially at a time when subsidy cuts are reducing affordability, Fofack says.
  • Rotational blackouts and load shedding to regulate access to power have been “constraining the drive for productivity growth and ongoing efforts to boost investor confidence.”
  • As long as load shedding and rotational blackouts continue to be in effect, the progress made by Eskom will not perceptible, Fofack says.
  • And South Africa still suffers from a “lack of consensus” on the role of competition in the electricity market as well as backlogs in grid investment.

‘Toxic’ IMF bailout

Recent media coverage of the possibility of an IMF bailout for South Africa has “further highlighted the scope of challenges facing the South African government and sensationalised the problem,” Fofack says.

  • While the threat of a bailout is likely to put more pressure on the government, the chances of it materializing are “very slim,” he argues.
  • South Africa still enjoys tremendous growth potential: very deep and highly liquid financial markets; low exposure to foreign currency risks; a broad-based and highly diversified economy; a solid domestic investor base; and highly diversified geographical destinations of trade.

The “politically toxic” nature of an IMF bailout is certainly the most important consideration against it, Fofack says.

  • Such a move would be “political suicide . . . No leader would want to be remembered as the first who took such a path.”

Public pensions

Fofack gives short shrift to hints from President Cyril Ramaphosa that the state could raid public pensions to raise cash.

  • “Nothing is more important for investors than the rule of law and property rights as well as the stability and credibility of state institutions,” he says.
  • Pensioners’ rights are protected through the rights to property which are full, inalienable and incontrovertible.
  • “The idea of the state raiding public pensions to mitigate widening fiscal deficits is far-fetched and should not even be contemplated by any country,” he says.

Bottom Line: Delays in downgrades from investment status occur for a reason: to give governments the chance prove that they are serious about reform.

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