Moody’s flags Eskom risk
POWER CUTS: WORST IN SOUTH AFRICA IN PAST FOUR YEARS
If SA has stage 4 load shedding every day, it will take away 10% of the economy, says economist.
Power utility Eskom raced to stabilise the grid by resorting to the most intense supply cuts in four years while Moody’s Investors Service warned a plan to fix it fell short.
Eskom implemented so-called stage four rotational power cuts from 1pm yesterday. That involves taking 4 000 megawatts (MW) of demand out of the system to prevent its complete collapse.
The reductions come as Moody’s Investors Service said the producer is a significant risk to South Africa’s finances and President Cyril Ramaphosa’s strategy to split the company into three does little to address its problems.
The rand was the worst major and emerging market currency against the US dollar yesterday.
“No modern economy can operate without power,” said Mike Schussler, an economist at economists.co.za. “If we had stage four load shedding every day, it would take away 10% of the power of the South African economy.”
Eskom has about 40 000MW of installed generating capacity.
Credit-Negative
Providing Eskom, which has R419 billion of debt, financial support before taking measures to generate savings at the utility would be credit-negative for the country, Moody’s said.
The remedies would entail “unpopular decisions on electricity tariffs”, it said.
Power cuts may cost the country as much as R5 billion a day, according to the Organisation Undoing Tax Abuse.
Regular supply interruptions are creating uncertainty that endangers businesses that are highly dependent on the utility, said Shaun Nel, spokesperson for the Energy Intensive Users Group of SA, whose members consume more than 40% of South Africa’s power and include Anglo American.
“We’re going to see companies close in the smelting industry,” he said. Between already-high tariffs and the spectre of more supply cuts, the victims will be “small foundries and smelters that shut down and never come back”.
Tariff request
Eskom has asked for permission to raise power tariffs by 15% in each of the next three fiscal years, more than triple the average inflation rate over the past 12 months.
If allowed, this would ease the government’s contingent liability risk but stoke inflation and weigh on economic growth, said Moody’s. Small price increases would “maintain pressure on the company’s very weak financial profile”, it said.
A breakup into generation, distribution and transmission businesses will enable each unit to better manage costs and make it easier to raise funding, the government said.
Credit-rating companies see Eskom as a key risk to South Africa’s economy, with blackouts and huge debt a drag on growth prospects.
Moody’s is the only one of the three major ratings companies that has South Africa’s debt at investment grade. It raised the outlook on the assessment to stable from negative in March and will publish its next assessment on March 29, a month after the release of the 2019 budget.
Moody’s comments are a reminder that major structural issues such as power insufficiency are serious constraints on the real economy. – Bloomberg