Ratings agency Moody’s has warned that South Africa’s planned R59 billion bailout for Eskom is ‘credit negative’.
In a notice published on Wednesday (24 July), the ratings agency said government’s room to manoeuvre was ‘extremely constrained’.
“Additional support to Eskom in the special appropriation bill will adversely pressure the government’s fiscal position, given its limited room to absorb the extra cost,” it said.
Moody’s is currently the only major ratings agency that has South Africa in investment grade, one notch above junk, with a stable outlook.
The country has been rated below investment grade since 2017 by ratings agencies Standard & Poor and Fitch.
Moody’s has previously warned that a change in the outlook to negative would be likely driven by rising debt levels and other contingent liability risks – particularly from SOEs.
Should the agency also downgrade South Africa to junk status, the country would no longer be eligible for inclusion in debt gauges such as Citigroup Inc’s World Government Bond Index (WGBI).
This would trigger a major outflow of money from the country estimated to be in the region of R100 billion.
On Tuesday (23 July) the South African government will make an extra R59 billion available to state-owned power utility Eskom over the next two years so it can meet its obligations.
The cash injection, sourced from the government’s National Revenue Fund, will provide R26 billion for the 2019/20 financial year and R33 billion for 2020/21.
Further details of a government task team turnaround plan, which includes splitting it into generation, transmission and distribution units under a state holding company, remain under wraps.
The board also has to name a new chief executive officer to replace Phakamani Hadebe, who will leave at the end of the month, while the appointment of a chief restructuring officer is imminent.