Eskom meltdown puts ratings at risk
Knock-on effects pose further risk to struggling economy
SA’s credit ratings outlook hangs in the balance, and growth estimates may now also be revised down following the return of rolling power blackouts this week that are expected to continue until April.
The move to stage-four load-shedding, which was due to the loss of six additional units, has economists fretting about the consequences for industrial output, which accounts for just under 25% of SA’s GDP.
SA’s foundry industry had lost 90% capacity over the past decade, and there is a massive reduction in aluminium smelting, beneficiation and chrome smelting, which have shifted to Malaysia and China. This is despite SA having 90% of the world’s chrome ore. SA’s smelting has dropped to less than 60% of global beneficiation, said Shaun Nel, spokesperson for the Energy Intensive Users Group of Southern Africa.
Big industries have been experiencing power cuts for the past few months and now fear a substantial rise in electricity tariffs.
Nel said industrial companies had been subject to 20% cuts on energy over the past couple of months and had exhausted opportunities to mitigate the crisis over the past 10 years. He said massive power tariff increases at a time when companies were unable to access energy were affecting production.
“The reality is that the industry is now at a tipping point … The option would be for people to shut down plants and move to other jurisdictions in the world,” Nel said.
Other industries had also been severely disrupted, the result of which could be another negative start-of-the-year quarter for GDP, Investec said, adding that the bank may revise its growth forecast downwards for the year.
The manufacturing sector, a component of the industrial sector, is concerned about the current de-industrialisation that would be exacerbated by energy shortages.
Philippa Rodseth, executive director of the Manufacturing Circle, a voice for South African manufacturing, said manufacturers were “not producing at full output”.
Unplanned power cuts were disruptive for producers needing to keep up continuous production.
Standard Bank has calculated that for every five-percentage-point reduction in power, “between 0.3 [and] 0.5 of a percentage point” would be shaved off growth, the bank’s chief economist Goolam Ballim said on Wednesday.
Standard Bank expects growth of 1.3% this year, with the economy growing at less than 1% before the general elections in May and accelerating to 1.5% in the second half of 2019 — if the election outcome is “benign”.
Even so, a GDP growth rate of at least 2.5% over the medium term is required to stabilise public finance and stimulate job creation, Ballim said.
Investec’s Annabel Bishop said weaker growth projections would be credit-negative “as SA’s debt projections would automatically elevate”.
Finance minister Tito Mboweni will deliver the 2019 budget on Wednesday, when he will unpack debt issues and financial support for Eskom.
On Monday, Moody’s, the international credit ratings agency, warned that if the government provided financial aid first, with measures to generate savings at Eskom coming only later, this would be credit-negative for the sovereign rating.
Ballim said that despite the risks, the state could adopt Eskom’s debt service costs rather than the utility’s debt stock. If this was accompanied by a credible turnaround strategy for Eskom, ratings agencies might be forgiving.
“The state can afford to adopt Eskom’s debt service costs for a year or two to create some breathing space but keep the debt stock still beholden to Eskom.”
Eskom’s debt is more than R400bn. The utility, which borrows to service debt, is battling to afford maintenance and this week cut supply by 4,000MW as its ailing power stations struggled to cope with demand.
But others think the economic impact of load-shedding will be limited.
John Ashbourne, senior emerging-markets economist at Capital Economics, said power cuts caused more popular anger than quantifiable economic harm as Eskom tended to focus on residential areas, while sparing industry. “During the worst of the cuts in 2015, manufacturing output only fell by 3.6% year on year, before rebounding. And even attributing this fall solely to power issues is difficult; manufacturing output fell by a comparable amount in mid-2017, when power output was rising.
“Unless cuts become much more frequent, we expect that their inconvenience will outweigh their economic cost.”
Ashbourne said what was of concern was that the decommissioning of older plants meant that Eskom’s generating capacity would fall next year.