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Cape Town – Ratings agencies will not look kindly upon government’s sizeable guarantees to state-owned entities in light of the lack of private sector funding, says Peter Attard Montalto, Nomura emerging market economist.
“Government, National Treasury and parastatals (Eskom especially) have stated they wish to reduce the burden of guarantees on the sovereign. This burden is caused by a lack of private sector funding availability but also moving more debt to be unsecured in name only," he says.
Nomura is of the view that there are is a blanket guarantee for all parastatal debt but particularly larger companies where there is significant risk of cross-default (a clause that puts a borrower in default if the borrower defaults on another obligation) and political sensitivity, he explains.
He cites the recent debacle around Eskom and the Development Bank of Southern Africa (DBSA) and the Standard Bank and SAA where loans have come under threat.
Eskom was threatened by the DBSA that it would retract its R15bn if no action was taken against Anoj Singh who is said to be implicated in the Gupta e-mails having done questionable deals with the family on behalf of Eskom. Singh has since been placed on leave pending an investigation into his conduct at the power utility.
Similarly, Standard Chartered ordered SAA to repay its loan which prompted Treasury to step in. Funds were transferred from the National Revenue Fund – money reserved for unforeseen emergencies, such as natural disasters.
“The recent DBSA/Eskom [issue] highlights that the relatively ‘innocent’ R254bn of guarantees Eskom has (as at end-March) can quickly become a single accelerated block at risk. The same is true of the SAA/Standard Chartered issues."
Montalto says implicit state exposure to guarantees is often much higher than stated and will continue to increase, as funding remains constrained.
Further ratings downgrades
“We believe that the issue of parastatals, their risks, governance, funding restraints and links to the sovereign will become an increasingly important issue for the ratings agencies.”
This may ultimately be a contributing factor that could push both Standard & Poor (S&P) to downgrade South Africa’s local currency rating also to junk status and Moody’s to downgrade both the foreign and local currency to junk.
S&P currently downgraded South Africa’s foreign currency rating to sub-investment grade in April, but kept the local currency rating at investment grade, while Moody’s in June downgraded both the foreign and local currency debt ratings by one notch with a negative outlook yet kept them at investment grade.
Montalto says S&P may decide to downgrade South Africa in November, although it could wait until after the February budget next year. Moody’s may act in February
“As such, we still see a strong chance of South Africa being removed from the World Government Bond Index (WGBI) in the second quarter of 2018 at the earliest, which would result in outflows of around $8bn to $9bn from the local bond market.
“Such a downgrade would add increased debt service strain to parastatals though we believe most of them have renegotiated bilateral credit clauses, which could mean there is less of a cliff edge.”
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