Eskom is the ‘one risk to watch’ as SA veers towards junk status

Cape Town - Eskom “will remain the one risk to watch with its increasingly monopolistic mind-set”, Nomura research into South Africa’s risks for 2017 reveals.

“S&P could still downgrade (South Africa) to junk mid-year, particularly depending on the situation at Eskom, which we expect to show further deterioration in credit metrics when including nuclear and its wider monopolistic mind-set,” Nomura emerging market economist Peter Montalto explained in a report on Friday.

Other reasons why Eskom will be a risk includes its “push back on paying renewable feed in tariffs, March deadline for guarantee framework renewal, nuclear procurement process moving forwards and tariff compression concerns depending on court judgements to come”.

“The market has shown particular interest in the nuclear issue, though this will likely be slow moving through 2017,” said Montalto.

The guarantee renewal process will be a key test of the National Treasury’s oversight ability on Eskom, said Montalto. This follows “a fractious relationship in 2016”.

“We will monitor closely what additional conditionality around wider balance sheet risks (such as nuclear and governance) the National Treasury puts on the parastatal as part of this process in the coming months.

“The Eskom narrative remains one of reduced domestic demand from a weak economy, allowing profit to be built up from cost reflective export sales.

“As such, short-run balance-sheet risks remain low, but the equity level and debt dynamics remain stuck at weak multiple levels, albeit stabilised thanks to the last equity injection.

“Energy security worries ebbed through 2016 as more renewables capacity came on stream and with reduced demand and will likely be further reduced in 2017 with further capacity from coal new built ready to come on-stream into start 2018.

“As such, the issues on the parastatal are on its build-up of contingent liabilities for the state, its monopolistic mind-set and its effect on the economy, as well as its Public Protector’s alleged involvement in tenderpreneurship.”