Multi-Billion Rand Eskom Debt Relief Welcomed, but Risk of Fiscal Cliff Remains High Says Leading Risk Consultancy

While Government’s R250-billion Eskom debt relief announcement will help stabilise the cash-strapped utility in the short term, South Africa’s energy risk quotient remains unchanged says Volker Von Widdern , Riskonet Africa’s strategic risk principal.

The Treasury says it hopes the relief announced in this week’s Budget Speech will set the company on a path to sustainability, but Von Widdern says there are still concerns over how ongoing spending is prioritised at the beleaguered parastatal as well as little indication that high levels of corruption at along the coal supply line have been dealt with.

In addition, he says Eskom's debt relief will inevitably result in increased borrowing for the government which will increase debt servicing costs and put pressure on future service delivery because an increasing proportion of tax revenue is required to pay debt. . Economists say the relationship of debt to GDP is likely to rise for the next three years at least before stabilising at just under 75%. If debt is not limited to the planned levels, the risk of reaching a fiscal cliff is substantial.?

Notes Von Widdern: “The Finance Minister had little option in announcing the relief deal given that Eskom is drowning in debt and this is having a negative impact on current maintenance operations as well as long-term planning. Carrying this burden has also impeded our ability to borrow to expand the grid over time. While Eskom’s risk profile has been dialled down, it would be foolish to think that its problems have been dealt with.”?

Government now takes on responsibility for all Eskom's debt repayments as it matures and annual interest costs. These amount to R78 billion in 2023/24, R66 billion in 2024/25, and R40 billion in 2025/26. In 2025/26, the Treasury will also take over up to R70 billion on Eskom's loan portfolio.?The Treasury believes the arrangement is fair to all Eskom's creditors.

Von Widdern says strict conditions attached to the deal are to be welcomed provided they are adhered to in terms of strict rules of governance, something which has been lacking in many parts of the organisation. The debt relief is subject to a review of all Eskom's coal-fired power plants by an international consortium appointed by the Treasury.

Von Widdern says in addition the sudden departure of the CEO Andre de Ruyter after a frank television interview in which he opened up about entrenched levels of malfeasance is poorly timed and as it now puts pressure on the board and government to find a replacement. De Ruyter was due to have left at the end of March after announcing his resignation last year.

Says Von Widdern: “Debt relief is one thing, but investors across the FDI spectrum are looking for leadership skill and stability which does not exist right now.”