Page 4 - AfrElec Week 44

AfrElec COMMENTARY AfrElec
South Africa avoids junk status for debt but Eskom suffers further
Debt downgrades are the result of the South African government’s inability to forge a coherent rescue plan for Eskom and the economy as a whole, writes Richard Lockhart
SOUTH AFRICA
WHAT:
Moody’s has downgraded Eskom’s rating, and the country’s outlook to negative
WHY:
The government has failed to take strong action to control debt, cut spending and address falling economic growth forecasts
WHAT NEXT:
The government to provide more detail on debt relief and the future of coal of investors
are to maintain any commitment to South Africa
MOODY’S long-awaited judgement on the future of Eskom and indeed the whole South African economy arrived on November 1.
The bad news for Eskom, which saw its debt downgraded, was tempered by Moody’s main- taining its investment-grade rating for South Africa’s debt, effectively granting an extension to the South African government’s attempts to forge a new policy for turning around Eskom and saving the economy.
Downgrade
Put simply, Moody’s downgraded Eskom’s unse- cured debt on November 1, which was immedi- ately dubbed “disappointing,” by Eskom.
However, Moody’s did maintain South Africa’s long-term foreign currency and local currency issuer rating at Baa3, but lowered the outlook to negative.
Moody’s downgraded to B3 from B2 the long- term corporate family rating (CFR) of Eskom. It also revised down the coupon Eurobonds rating to B3 from B2 for its global medium term note (GMTN) programme. The senior unsecured global medium term notes (GMTNs) of Eskom were also downgraded to (P)Caa1/Caa1 from (P)B3/B3.
The ratings agency said the “outlook remains negative”.
For South Africa as a whole, while maintain- ing the country’s last investment-grade rating, Moody’s downgraded the outlook from “stable” to “negative.”
Taken together, Moody’s sent a signal to the government that it must take much stronger action to get debt under control, cut spending and address falling economic growth forecasts.
Eskom’s response
In a statement, Eskom said it noted “with dis- appointment the ratings decisions implemented by Moody’s”.
“The current board and management have worked painstakingly hard to try to resolve corporate governance issues of the past regime. Eskom also continues to implement the genera- tion recovery 9-point plan to stabilise the plant and the security of supply; while the system has been constrained, we have endeavoured to
provide a secure and stable electricity supply.” The statement highlights the central issues facing Eskom’s new management and the gov- ernment. They must implement new reforms that will split up the company into three parts, reduce the company’s debt burden and prevent power cuts by radically overhauling the genera-
tion and supply networks.
Urgency
Eskom and the government have little time to ponder how to reform the company.
On November 5, Eskom admitted that the national grid was “severely constrained,” and that it was relying on emergency resources, such as diesel and pumped storage hydro plants, to keep the lights on and minimise rolling black-outs, known as load-shedding.
Eskom said that 12,500 MW of genera- tion had been offline on November 3, falling to 11,500 MW on November 5. The company blamed the system’s deterioration on unplanned breakdowns.
The company said that many power plants were set to return to service during the week, meaning that together with using more die- sel – dirty and expensive – the probability of load-shedding remained low for the rest of the week.
Load-shedding has a major economic impact on businesses, and there have been widespread protests at many power plants against the inter- ruptions. For example, coal trucks were attacked and set on fire at the Matla and Arnott power plants.
However, Eskom insisted that such protests had not affected operations.
“The sporadic interruption of coal delivery by trucks does not have an immediate impact on the coal status at both Arnot and Matla,” said Eskom. “Should the interruption intensify or spread over an extended period it may affect the healthy stock level.”
Government plans
The verdict from Moody’s follows the govern- ment’s hesitation in adding any detail to its plans to break up Eskom into generation, transmission and distribution units and eventually to bring its
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w w w . N E W S B A S E . c o m Week 44 06•November•2019