Eskom’s woes far from over

ESKOM continues to pose a great threat to South Africa’s economy, making it likely that the country will be downgraded to junk status in the coming months.

The recent load-shedding, which is affecting the country, is a clear indication the problems faced by the power utility are far from over. Over the years, Eskom has received bailouts worth billions from the state to fix the dire situation it is in.

However, the situation at the power utility continues to worsen. Eskom’s new chief executive officer, Andre de Ruyter, has his work cut out as he must ensure the situation is fixed urgently because the instability of the utility leaves South Africa’s economy hanging by a thread.

Eskom generates approximately 95% of the electricity used in South Africa and approximately 45% of the electricity used in Africa.

It is also by far the largest of South Africa’s many state-owned enterprises and, unfortunately, is the single largest threat to South Africa’s economy. The power utility is faced with two major problems.

First, its operating costs are too high and, therefore, it cannot afford to pay them. Second, the utility has incurred over R400 billon in debt and does not generate enough cash to pay the interest.

Corruption and maladministration are the main factors that have resulted in the problems Eskom currently faces. Over the years, Eskom has failed to adequately maintain its power systems and has also failed to construct new power stations in time, in order to meet the country’s growing demand for electricity. Therefore, the utility has been forced to implement load-shedding over the years.

Unfortunately, the government is increasingly running out of time to convince investors and rating agencies it has the situation at Eskom under control.

Continued power cuts make it difficult for South Africa to escape the prospect of a credit rating downgrade to junk, in a few months to come.

The resignation of Eskom board chairperson Jabu Mabuza, is a clear indication the power utility’s woes are far from over. Last week, the World Bank released its Global Economic Prospects report, which outlined the global lender’s decision to cut South Africa’s growth forecast to below 1%, due to electricity supply concerns. This decision further indicates that 2020 could be a very tough year for South Africa.

A credit rating downgrade to junk status will affect South Africa in so many ways. First, the cost of borrowing will increase, making it difficult for many South Africans to borrow money from banks.

Second, international funds will take money out of South Africa. This will result in a significant amount of capital leaving the country. Third, the rand will weaken, and goods will cost more. Fourth, Treasury could find itself forced to increase taxes in order to draw money into the fiscus.

All the attention is now on Finance Minister Tito Mboweni’s budget speech presentation, to be delivered next month. One can only hope 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 – which will be welcomed by foreign investors and rating agencies.