A year ago, SA’s credit rating downgrade to non-investment grade – or junk status – by rating agency Moody’s Investor Services hinged largely on the fortunes of state-owned enterprises (SOEs).
Top of Moody’s concerns in February 2017 was whether cash-strapped SOEs would be able to service debts running into hundreds of billions, considering that they are reliant on government bailouts. The stakes are high, as the country’s economic growth is heavily tied to the health and performance of its SOEs.
But a year later, Moody’s, the last of the three major rating agencies to lift SA’s sovereign credit rating to investment grade, seems to have a more upbeat view regarding SOEs. This isn’t to say that SOEs aren’t posing any risks to the country’s fiscal outlook, but some have had positive developments in recent months.
So much so that Moody’s signalled that SA might escape a ratings downgrade in the near future. “We think things look fairly stable and the worst is probably behind us,” says the firm’s lead analyst for SA, Lucie Villa. This assessment is partly influenced by SA’s macroeconomic policy framework being “relatively effective” in dealing with headwinds, and the government’s renewed focus on fixing governance issues at SOEs.
Of the more than 20 SOEs, power utility Eskom is arguably the most important for the economy. Moody’s views the removal of individuals implicated in corruption and fraud allegations from the board of Eskom, which was at the centre of the state capture project, as positive.
“The new board is taking measures to address governance issues. That is positive,” says Helen Francis, Moody’s senior credit officer for infrastructure finance.
Francis says Moody’s is still concerned about Eskom’s “very weak credit profile” and its “extreme liquidity crisis.” Moody’s lowered Eskom’s credit rating to the fifth rung of junk status (B2), which is significantly lower than SA’s investment grade rating of Baa3.
Eskom’s revelation that it suffered an R2.3 billion net loss for the year ended March, and R20 billion in irregular expenditure dating as far back as 2012, has spurred Moody’s to say that the government is likely to financially support the utility. Eskom has debt levels of around R390 billion, of which about R218 billion is due in the next five years. Around R270 billion of the debt is guaranteed – meaning that debt holders would turn to government if Eskom fails to service its debt.
“Given the support that the government has provided in the past through government guarantees, we think there is a strong probability that the government would provide more support to Eskom to avoid a payment default,” says Francis.
Because of this, Moody’s expects a fiscal deficit (where government’s total expenditure exceeds its revenue generated) of around 4% of gross domestic product in 2018/19 – higher than the 3.6% forecast by National Treasury.
Although Eskom recently secured a R33-billion government-guaranteed loan from the China Development Bank, it still needs to raise about R10 billion in capital expenditure to fund the construction of the Kusile and Medupi coal-fired power stations.
New board appointments at Eskom are not enough to restore good governance, says Olga Constantatos, Futuregrowth Asset Management’s credit, and equity process manager. Futuregrowth, which manages over R150 billion in fixed-income assets, stopped lending to Eskom in 2016 over concerns about poor governance and financial mismanagement.
Constantatos says SOEs still need to improve their disclosure on the appointment of board members and senior executives, which are unilaterally made by public enterprises minister Pravin Gordhan. “We need to know who these individuals are. Are they appropriately qualified? Are they ethical? Have they been removed from a position of trust before? Are they conflicted in a sense of do they have other personal businesses or family businesses?”