Godongwana’s Eskom debt conundrum

Further details about the government’s takeover of a significant portion of Eskom’s debt are slated for Finance Minister Enoch Godongwana’s budget speech next week. However, analysts doubt that he will table a concrete plan.

In the medium-term budget policy statement (MTBPS), Godongwana announced that the “government will take over a significant portion of Eskom’s R400 billion debt”.

The exact “quantum is expected to be between a third and two-thirds of Eskom’s current debt,” said Godongwana.

The debt takeover aims to enable Eskom to increase maintenance spending and improve grid capacity.

The programme will include strict conditions required of Eskom, such as lowering costs, a plan to address growing municipal debt arrears, and increased transparency in tariff pricing.

Godongwana said further details would be provided in the Budget Speech this week.

Analysts, however, doubt any detail will be forthcoming from the minister.

Absa’s macroeconomics research unit “does not expect a full Eskom debt deal to be unveiled at the budget, and thus sees some room for market disappointment”.

It is due to the “complexity of Eskom’s debt and apparent lack of progress on the Treasury’s conditions for granting debt relief”.

Eskom has been unable to lower its costs and address growing municipal debt owed to the utility. It is also increasingly difficult to secure creditor consent for the debt transfer.

Eskom’s debt is widely held locally and globally, making creditor agreements for the transfer of debt to the government complex.

Roughly a third is owed to development finance institutions such as the World Bank and China Development Bank, 15% is owed to international investors such as BlackRock and Fidelity through international bonds, and 42% is rand-denominated debt held by local institutions and investors.

It means that Treasury and Eskom have to engage with multiple stakeholders who hold Eskom debt in multiple currencies to agree to the debt transfer.

Due to these complex creditor agreements, analysts at Citi Bank say that “there is likely to be little action” after the budget speech.

JP Morgan has told investors that “Eskom should be considered an extension of the sovereign” regardless of a debt transfer.

Momentum Investments said in their pre-budget commentary that “financial markets are growing impatient for a solution to Eskom’s R400 billion debt” and “expectations are high” for Godongwana’s budget.

The consensus, according to Momentum, is for government to assume between R200 billion and R250 billion of Eskom’s debt.

Momentum is in agreement with Godongwana that the debt transfer should occur in stages to ensure that South Africa’s debt-to-GDP ratio remains stable.

The net impact of a government takeover of a significant portion of Eskom’s debt is a higher debt ratio, around 2.5% to 3% higher, and a higher debt servicing ratio.

The debt takeover plan, if it takes this form, will be positively received by the market and enable Eskom to tap capital markets to fund its maintenance programme and expand its capacity, according to Momentum.

Nedbank and Absa have provided an alternative solution to bolster Eskom’s cash flow without the government taking on substantial debt.

Their approach entails the government providing regular liquidity injections of roughly R80 billion annually, of which R65 billion should be used to service debt.

However, the government is reluctant to use a method that has previously been unsuccessful in reducing Eskom’s debt.

Furthermore, Treasury is unlikely to trust Eskom’s management to allocate the capital effectively and would rather manage the debt itself.

Alexander Forbes thinks differently from their peers in anticipating a “credible action plan” to be presented at the budget speech. However, it is not clear whether action will follow.

Reuters reported that Godongwana said he is “sharpening his pencil” to provide details during the budget speech on the government’s takeover of Eskom’s debt.