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Doubtful if nuclear ruling will derail Moody's ratings cut - economist

Apr 26 2017 18:33
Carin Smith

Cape Town - It is doubtful whether Wednesday's nuclear court decision would derail a ratings cut from Moody’s, according to emerging markets economist Peter Attard Montalto of Nomura.

It does put more focus on an S&P local ratings cut this year, though, given the growth shock Nomura expects, that should happen eventually anyway, in his view.

Therefore, the wide-ranging high court judgment - basically throwing out SA's entire nuclear procurement process, including intergovernmental agreements - can be seen as a marginal positive for ratings and the market, he said.

Montalto added that this marginal positive for ratings will, however, be within a set of larger negative factors and shocks.

NGOs Earthlife Africa and the SA Faith Communities Environment Institute (Safcei) already approached the Western Cape High Court in October 2015 - before Nenegate.

Judge Lee Bozalek ruled in favour of the applicants against government.

READ: Nuclear ruling to cause 'great unhappiness' in Russian camp

In his ruling, he declared unlawful government’s attempts to secure 9.6 GW of nuclear energy, including the initial determination to procure nuclear energy in 2013, the cooperation agreements signed with Russia, the US and South Korea, as well as former energy minister Tina Joemat-Pettersson’s decision to hand over the procurement of nuclear energy to Eskom late last year.
"While an appeal is likely, if unsuccessful the government is back to square one. A winding road still exists from here towards nuclear power, which we expect the government and Eskom, under significant pressure, to try to navigate," said Montalto.

"But a large ‘benign’ window - for appeals or restarting the process - has now opened up, taking pressure off the National Treasury specifically - especially Eskom trying to push its feed-in tariff obligations onto the National Treasury."

Montalto expects the SA government to appeal Wednesday's decision, because - in his view - "the Zuma faction" is under pressure to show progress on nuclear procurement.

"We think it was a key contributing factor to Nenegate and the recent reshuffle," said Montalto.

READ: Court sets aside nuclear deals with Russia, other countries

Montalto cautioned that the nuclear issue cannot be dead here. The stakes politically and geopolitically for the government, and specifically for Zuma, are simply too high, in his opinion.

"Overall, this ruling adds both time and further obstacles to nuclear implementation...For us, however, the real focus was getting far enough to have contingent liabilities put in place as the key investor and credit risk to the sovereign," said Montalto.

"Remember, no significant money or contingent liability commitments had been made so far on the process. It was still at a relatively early stage."

To Montalto, ultimately the whole nuclear issue in SA is not about technology type, environmental issues or energy mix policy or even cost.

"Instead, we have always seen the ability to undertake such a high-cost project corruption-free as impossible. We certainly do not think today’s events have killed off SA’s nuclear plans but, alongside the other post-reshuffle issues, they have made the path from here longer and more winding," he explained.

"Together with the more stretched path for Moody’s to reach sub-investment grade and the benign market reaction to the last reshuffle, we think this means focus remains on December and the elective conference...Now, however, the process of actual nuclear procurement may extend beyond his term and so put further pressure on the succession."

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