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Finance Minister Tito Mboweni has a tough task ahead of him: convincing rating agency Moody's that, despite a review in South Africa's outlook from stable to negative in November, it should not be downgraded to junk status in the near future. And yet the country retains a giant albatross around its neck in the form of its ailing power utility, Eskom, whose CEO recently warned that the spectre of load shedding would not be disappearing any time soon.
Eskom, despite an evolving long-term strategy to turn around its fortunes, continues to pose a great threat to South Africa's economy, making it ever more likely that South Africa will be downgraded to junk status in the coming months.
The ongoing load shedding affecting the entire country is a clear indication that the power utility's problems are far from over. Over the years, Eskom has received billions in bailouts, and yet its predicament continues to worsen.
New chief executive Andre de Ruyter has his work cut out.
With debt of some R450bn, and a legacy of corruption and maladministration, the utility's operating costs are too high, and it does not generate enough cash to pay the interest on its debts. It has also failed to maintain its power systems and construct effective new power systems in time to meet the country's growing demand.
All this we know. But it does not change the devastating impact. The manufacturing industry is sustaining heavy losses, as manufacturers are forced to stop production during power cuts, while their costs and deadlines do not stop. Manufacturing, meanwhile, despite being in decline for some years, accounts for about 14% of GDP in South Africa – which has a severe knock-on economic effect.
The agricultural industry has been similarly impacted, with farmers dependent on electricity for farming activities, which in turn has a knock-on effect for consumers – who rely on irrigation- and energy-intensive industries to produce some 25% of their food.
In November, Moody's affirmed SA's long-term foreign and local currency debt ratings at Baa3-, the lowest investment grade level, despite the adjustment to the country's outlook. The rating agency also slashed SA's economic growth outlook for 2020 from 1.5% to 1%.
It also recently gave Mboweni until the February budget – that's this month – to deliver a plan to stabilise government debt and address risks posed by unstable state-owned enterprises, mainly Eskom, on the fiscus – or face a downgrade to junk.
November also saw Standard & Poor's changing its outlook on South Africa, citing a growing debt burden. S&P noted the " crystallization of contingent liabilities related to state-owned enterprises, especially Eskom". Fitch similarly has South Africa on a negative outlook.
Government is running out of time to convince investors and rating agencies that it has the situation in the country in general, and Eskom in particular, under control.
Power cuts that continue to be implemented make it difficult for South Africa to escape the prospect of a credit rating downgrade to junk, in a few months to come.
A credit rating downgrade to junk status will affect South Africa in so many ways: the cost of borrowing will increase, making it difficult for many South Africans to borrow money from banks; international funds will take money out of South Africa, resulting in a significant amount of capital leaving the country. Thirdly, the rand will weaken, and goods will cost more.
Treasury could find itself forced to increase taxes in order to draw money into the fiscus. Lastly, treasury might even be forced to cut social grants in order to repay its debt. For already cash-strapped citizens awaiting the Finance Minister's budget with bated breath – and wondering how their finances will be affected – it's a prospect too ghastly to contemplate.
All the attention is now on Finance Minister Tito Mboweni’s budget speech presentation, that will be delivered in February. One can only hope that the minister will be able to provide a comprehensive plan that will effectively stabilise government debt and address risks posed by state-owned enterprises-mainly Eskom- that will be welcomed by foreign investors and rating agencies.
Mlondi Mdluli is an economic and political commentator, writer and researcher. He is also an Economics graduate from the University of KwaZulu-Natal. Views expressed are his own.
