Sovereign Analysis / South Africa

South Africa has to solve the Eskom problem

  • South Africa is at inflection point, and failure to reform Eskom will push it further towards financial crisis
  • The cost of supporting SOEs (namely Eskom) is at least 2.6% of GDP over the next 3 years and 0.4% annually thereafter
  • Tariff hikes, staff cuts, improved bill collection, and privatisation are needed to limit the ongoing fiscal drag
South Africa has to solve the Eskom problem

In this report we take a deep dive into the challenges facing Eskom and its ongoing reform efforts, in order to parse the potential implications for the sovereign. Without concerted efforts by the government to solve the Eskom problem, South Africa risks sacrificing its economic future for the sake of a single failing company. However, if the government uses the current economic crisis to catalyse aggressive reforms, then it could begin to pull South Africa back from the brink.

For the past decade South Africa has been on a slippery slope, with public debt rising from a low of 26.5% of GDP just before the 2008 global financial crisis to 63.5% by the end of FY 2019/20 in March. That trend accelerated sharply post-Covid, with debt expected to reach 81.8% of GDP in 2020/21 and potentially rise above 140% of GDP over the next decade absent concerted policy efforts (see here).

South Africa’s notoriously weak and mismanaged State-owned enterprises (SOEs) have been one of the key drags on public finances, recording an average ROE of -2% over the past five years and often requiring government transfers to stay afloat, with aggregate operating cashflows insufficient to cover debt service.

South Africa’s state-owned utility, Eskom, is the main source of this persistent weakness. It has been FCF-negative since at least 2012 (the last year for which reports can be downloaded), burning on average US$3.5bn a year from 2012-19.

Until FY 2017/18 (ending in March), Eskom generated enough operating cash to cover interest payments on its debt. But in 2018/19 operating cash flows dropped below interest payments, which effectively means the government needed to borrow just to service its debt.

In addition, ZAR depreciation has pushed up the cost of debt service as nearly two-thirds of its ZAR555bn (cUS$33.4bn) of debt is denominated in USD and EUR, per Bloomberg DDIS data. This is up from ZAR488bn (US$27.4bn) in March and ZAR454bn (US$30bn) last September, pointing to both substantial new borrowing and revaluation effects.

There is no way out of this vicious circle without aggressive reforms to make Eskom – and South Africa’s other SOEs – profitable, and until then its funding gap will have to be funded by the government. Budgetary allocations to financially distressed SOEs have already reached ZAR162bn (US$9.75bn, or 4.5% of GDP) over the past 12 years, of which Eskom accounts for c82%.

And the ongoing budgetary cost is only expected to rise, with the government committing another ZAR129.2bn (US$7.8bn, or 2.6% of GDP) to support SOEs over the next three years (of which 87% is for Eskom).

In the 2019 budget, the National Treasury (NT) allocated ZAR23bn of annual support for Eskom over the next decade. This was later increased to ZAR49bn in 2019/20, ZAR56bn in 2020/21, and ZAR33bn 2021/22, with ZAR23bn equating to an ongoing cost of c0.4% of GDP on an annual basis each year thereafter.

However, the fiscal cost is not limited to direct transfers. By the end of 2019/20, Eskom had amassed ZAR488bn (US$27.3bn, or 9.5% of GDP) of debt, of which ZAR297.4bn (US$16.6bn) was guaranteed by the government (out of a total guarantee ceiling of ZAR350bn).

Overall, contingent liabilities have reached 19% of GDP, comprising 11.8% of GDP of guarantees (over half of which for Eskom) and 8.2% of GDP of other liabilities. In February’s budget the NT forecast a rise to 20.8% of GDP by 2022/23, and this has likely risen post-Covid (with the IMF saying in July that contingent liabilities could reach 26% of GDP by the end of FY 2020/21).

Of the ZAR760bn (cUS$46bn) of debt service due over the long-term for South Africa’s seven largest SOEs, 62% is guaranteed by the government and ZAR178bn (cUS$10.75bn) will come due over the next three years (of which ZAR103.5bn, or cUS$6.25bn, is related to Eskom).

Meanwhile, financing constraints are increasingly forcing SOEs to seek government guarantees to unlock funding, with Eskom’s spread over sovereign rising from c50bps before Covid to c100bps now, and the spread on guaranteed vs non-guaranteed debt rising from c200bps to c350bps over the same period. As a result, only 75% of SOE borrowing requirements were met from 2017/18 to 2018/19, forcing SOEs to cut back on needed capex and rely more on direct funding and guarantees from the government.

Transferring Eskom’s debt to the government balance sheet has been proposed as a temporary workaround to rein in the cost of borrowing, but this will only paper over the problem. Contingent liabilities are one of the main risks to South Africa’s battered finances, widening the deficit through direct transfers and bailouts while simultaneously pushing up the cost of borrowing for the government.

Solving the Eskom problem is thus a necessary step to rein in South Africa’s yawning budget deficit and set debt on a sustainable trajectory, and it is impossible to formulate a view on the South African sovereign without understanding Eskom's outlook.

The rest of this note will focus on the challenges facing Eskom and its ongoing reform efforts to parse the potential implications for the sovereign. The key point is that without concerted efforts by the government to solve the Eskom problem, South Africa risks sacrificing its economic future for the sake of a single failing company.

The incredible cost of load shedding

Despite the enormous government outlays to keep Eskom afloat, it has failed to provide South Africa’s industrialised economy with enough power to operate at full capacity. After increasing by c45% in the 13 years following the end of apartheid, electricity production has remained stagnant over the subsequent 13 years and even before Covid was c5% below its 2007 peak.

This has given rise to a phenomenon known euphemistically as “load shedding,” or forced blackouts. The cumulative cost of load shedding was estimated at ZAR59-118bn (1.2-2.3% of GDP) in 2019 by the Council for Scientific and Economic Research (CSIR), and through the end of August, load shedding had already reached 1,500 GWh (surpassing its annual record). Using Eskom’s estimate of the economic cost of unserved energy (cZAR84,000/MWh), this would value the losses from load shedding so far this year at ZAR126bn (2.6% of projected full-year GDP) and counting.

Load shedding this year is the result of increased outages, both planned and unplanned, surpassing 13,000 MW for much of the year. Eskom says that load shedding will probably be required every month through March 2022 while it embarks on an intensive maintenance program, representing an ongoing drag on growth.

Years of chronic under-investment and poor maintenance have caused Eskom’s coal-fired power fleet (responsible for c75% of production) to reach an average age of 37 years, which – alongside delays to the commercial operation of the new Medupi and Kusile power stations due to project mismanagement – has brought down Eskom’s availability factor to an average of 66.9% so far this year (comprising 9.9% planned outages, 21.6% unplanned outages, and 1.6% “other” outages).

Unpacking Eskom’s underperformance

Eskom is plagued by many of the same problems facing utilities across the continent, which are succinctly outlined in a 2016 World Bank report (here). At the time of the study, the median “quasi-fiscal deficit” (i.e. annual loss of state-owned utilities) was 1.04% of GDP vs 3.43% of GDP for Eskom, resulting from four key factors: 1) underpricing; 2) T&D losses; 3) collection losses; and 4) overstaffing.

The study also measures the quasi-fiscal deficit under “benchmark performance”, which erases losses from T&D, bill collection and overstaffing to isolate the impact of underpricing. Under these conditions, the quasi-fiscal deficit drops to 0.42% of GDP in SSA and 2.78% of GDP in South Africa, with the number of utilities with cost-reflective tariffs rising from just 2 to 13 in SSA.

Critics of tariff increases rightly point out that South Africans should not pay the price for Eskom’s poor performance (citing mismanagement, overstaffing, and inflated prices for coal purchases due to corruption under the Zuma administration), and point to tariff increases that have far outstripped inflation over the past decade (with an average annual tariff increase of 12.6% vs inflation of 5.6%).

However, even after adjusting for chronic mismanagement, underpricing is a major issue. At the time of the study, 81% of Eskom’s losses were due to underpricing (with an average tariff of US$0.06/kWh vs costs of US$0.11/kWh – split equally between opex and capex – and an average tariff in SSA of US$0.15/kWh). Since then, the average tariff has risen to US$0.07/kWh in US$ terms, which is still just half the global average of US$0.14/kWh.

Eskom CFO Calib Cassim recently told MPs that a tariff increase of 25% in real terms was needed, while acknowledging that “it can’t go up once off due to the impact on the economy”. He added that a 10% tariff increase in 2022 would generate ZAR23bn of additional revenue, enough to offset the additional budget allocation to support Eskom that year.

However, the price-setting mechanism in South Africa is heavily regulated. Eskom must submit tariff requests to the national energy regulator (NERSA) under its multi-year price determination (MYPD) mechanism, which aims to set tariffs equal to cost. In the subsequent years, Eskom can make annual applications under the regulatory clearing account (RCA) to retroactively claw back revenue when it falls short of the MYPD estimate, resulting in additional tariff increases.

However, NERSA has habitually undercut Eskom’s tariff requests, fearing the social impact of tariff hikes. In response to Eskom’s 2018/19 tariff application, NERSA granted an average increase of 7.6% annually vs Eskom’s request of 16%, generating an estimated revenue shortfall of ZAR102bn. RCA clawback determinations in the same year led to an additional ZAR51bn shortfall, pushing the total shortfall to ZAR153bn (cUS$9.2bn).

Much of the shortfall is due to a NERSA decision to deduct the annual ZAR23bn of government transfers announced in the 2019 budget from its RCA allocations, reducing Eskom’s ROA to only 1.5% (far below the 9.5% WACC). The High Court recently ruled this unlawful, which could result in the clawback of ZAR69bn of revenue over the next three years and joins prior High Court decisions in March and June related to unlawful NERSA decisions that could result in up to ZAR31bn of additional revenue.

While this is good news for Eskom, clearly it cannot count on the generosity of the regulator to bring tariffs to cost-reflective levels. An increase of 25% in real terms, while not unprecedented (tariffs rose 34.2% in 2008/09 and 31.3% in 2009/10), would be a huge political feat and is unlikely to happen in the current context of a severe recession and high unemployment.

But without ambitious tariff hikes Eskom will continue to be lossmaking, requiring additional government support. Either the government can accept the need for tariff hikes, directly impacting consumers now, or require citizens to foot the bill indirectly via tax increases down the road coupled with the ambiguous but substantial cost of load shedding and South Africa’s cratering public finances.

Non-price reforms are also urgently required

It is equally clear that tariff hikes need to be accompanied by efforts to reel in Eskom’s other gaping inefficiencies, including bill collection losses, overstaffing and ageing infrastructure.

In addition to being South Africa’s main power producer, Eskom accounts for c40% of electricity distribution in the country. The rest is accounted for by municipalities who buy the power directly from Eskom. However, for years municipalities have been failing to pay their bills on time and in full.

As of May 2020, municipalities owed Eskom ZAR30bn of arrears, with over a third of the country’s metros owing at least ZAR1bn. The stock of arrears is highly concentrated, with the top 20 metros accounting for 80% of arrears and Soweto (Johannesburg’s largest township) accounting for nearly half.

However, Eskom has begun to make some progress in Soweto, with arrears declining from ZAR18.9bn last June to ZAR12.9bn by May this year (including interest). To get more residents to pay their bills, Eskom is converting households to prepaid electricity meters, and has so far rolled out 66,000 new prepaid meters. It will install another 17,500 this year, and will reach the remaining 52,000 households over the next two years.

Eskom has also become more aggressive with non-paying metros, recently seizing the bank accounts of the Maluti-a-Phofung municipality (which owes it ZAR5.3bn) and cutting supply to areas with illegal connections. However, completely eliminating arrears will likely be a long road given the politicisation of public services, with many viewing free electricity as part of the post-apartheid social contract.

The biggest internal issue is undoubtedly overstaffing, with the World Bank estimating that Eskom’s workforce is roughly two-thirds larger than the “optimal” level for a utility of Eskom’s size. More recent estimates have cited a figure closer to one third, but this still implies the need for headcount cuts of over 15,000.

While Eskom managed to decrease its headcount from 48,628 to 46,665 through natural attrition and a moratorium on new hires in 2019/20, compensation costs increased c13% to ZAR33.3bn due to above-inflation wage increases.

Cutting wages is a perpetually difficult task in South Africa due to its strong and militant unions, with a 2014 wage disagreement in the platinum sector leading to a six-month strike that ground the sector to halt. More recently, the 250,000-member Public Servants Association launched a petition to compel the state to honour a public service wage deal which it tried to renege on in April to stabilise state finances.

While Eskom employees are legally barred from striking, attempts to limit wages are likely to be met with strong resistance, and mass layoffs are a clear non-starter. Further, a prolonged labour dispute would be politically damaging for President Ramaphosa, whose political capital is already spread quite thin.

Lastly, while the World Bank report did not attribute any of Eskom’s shortfalls to T&D losses, investment will be required to keep future T&D losses contained with system interruptions rising by c11% over the past five years and transmission lines ageing to between 30-40 years on average.

Capex and routine maintenance have fallen to the wayside as operating revenue has barely been able to cover debt service costs, and Eskom’s losses would be even greater if it was making these necessary expenditures. But as under-serviced infrastructure increasingly fails, load shedding will become the new normal (as we are seeing now) unless maintenance ramps up and deferred capex is undertaken.

Unpacking Eskom’s reform plans

Against the backdrop of Eskom’s crumbling finances, the state has launched a number of reform initiatives. From the shorter-term perspective, it has reportedly agreed on a pact with business groups and labour unions to mobilise financing and reduce the debt burden. However, the pact is short on details, and appears more like a wish list than a path to reform.

Concrete measures include a commitment by the private sector and government to each secure an additional 2,500 MW of emergency power, and for Eskom to renegotiate overly onerous contracts with coal suppliers and renewable IPPs that were notorious sources of corruption and “state capture” under the Zuma administration.

It also provided vague proclamations that power prices must be cost-reflective and simultaneously affordable for businesses and households (though as we highlighted before this is a political minefield and unlikely to occur in the near-term), and promised to root out corruption and address its bloated management structure.

The plan did not mention a previous proposal for the PIC (which manages the pensions of state workers and has assets of ZAR2.1tn) to take over part of Eskom’s debt or to finance any new borrowing, alleviating concerns of a turn towards “prescribed asset purchases” as a way to divert funding to troubled SOEs.

In Eskom’s 2019 annual report, it targeted cumulative cash savings of ZAR77bn over the next four years but highlighted that cost savings alone will not be enough to restore financial health, with operating cashflows of ZAR32.7bn on the year falling far below debt service commitments of ZAR70.3bn.

As such, it reiterated the need for cost reflective pricing, saying that the average price would have to rise to an estimated ZAR120c/kWh (though this has likely increased to ZAR130-135/kWh, based on the 2020/21 tariff of ZAR106.80/kWh and recent guidance towards the need for a 25% increase in real terms).

Over the longer-term, government has laid out a restructuring plan (here) which centres around the “unbundling” of Eskom into three separate entities focused on generation, transmission and distribution, respectively.

Phase 1 of the plan – the functional separation of the entities – was due to be completed by the end of March, but it is not clear that the milestone was met. Meanwhile, Phase 2 – the complete legal separation of the distribution and generation functions – is due to be completed by year-end.

The unbundling of Eskom will, in theory, make it easier to effectively restructure each of its distinct business units and attract investors who may be interested in only certain parts of the business if privatisation is eventually pursued (with generation typically more attractive – see below).

However, given the importance of reliable power to South Africa’s post-Covid recovery, there is also an urgent need for new supply outside the auspices of Eskom’s long-term restructuring plan. To this end, the government has revived its Renewable Energy Independent Power Producers Program (REIPPP) and gazetted new regulations allowing Eskom to purchase up to 11,800 MW from IPPs.

Increasing IPP capacity will help offset the decommissioning of Eskom’s ageing coal fleet, scheduled to reach 12 GW by 2035, 28 GW by 2040 and all 35 GW of legacy plants by 2050. The 27 new REIPP projects already signed (totalling 2.3 GW of capacity) and the completion of Medupi and Kusile by 2022 (though both projects have experienced severe delays and cost overruns) are expected to offset plant decommissioning through 2025, but significant new capacity is still required to prevent load shedding.

While the government’s initial REIPPP contracts resulted in 5 GW of capacity, plans for a new round of contracts were abandoned under former President Zuma in favour of a massive US$100bn nuclear deal with Russia that many speculated was designed as a large patronage mechanism to funnel money into the pockets of Zuma cronies via inflated contracts.

While that plan has since been abandoned, there are unresolved problems to be dealt with in the REIPPP procurement process too. Namely, the initial REIPPP contracts were allegedly closed at above-market prices and with significant government guarantees, with government now engaging IPPs in negotiations on potential price reductions.

Government will have to walk a difficult tightrope by ensuring IPP contracts provide value for money, without disincentivising new investment by reneging on contractual commitments agreed under the old scheme. Over the long-term prices will need to be market-determined rather than set via rigid PPAs, but if competition doesn’t initially drive down prices then this shift could exacerbate the dreaded “death spiral” in which higher tariffs lead to lower demand which leads to still higher tariffs.

South Africa’s long-term energy plans are outlined in the 2019 Integrated Resource Plan (here), which will see the widespread replacement of coal capacity with renewable energy. Over the 11 years covered by the IRP, Eskom and IPPs will add 29.5 GW of new capacity (not including the 8.2 GW already agreed, 11.2 GW that will be decommissioned, and 4 GW of distributed sources), largely from solar and wind installations, which will see the portion of coal in the generation mix falling from c70% to c40%. 

While allowing IPPs to install some of the new generation will take some of the financial burden off of Eskom (which we estimate at cUS$75bn based on new capacity under the IRP, ex-distributed), the transmission and distribution units will continue to be loss-making if that power is purchased at above-market prices and/or future price increases cannot be passed onto consumers via cost reflective tariffs.

The shift to renewable energy will also present some major problems for an unbundled transmission unit, as the sporadic nature of solar and wind power makes it difficult to match demand and supply without significant investment in storage and/or adoption of creative demand management techniques such as time-of-use pricing.

Over the longer-term, Eskom’s financial viability will depend on its success in unbundling the business and implementing widespread reforms aimed at reversing years of mismanagement and under-investment. Ideally, the unbundling would be just the first step in a wider privatisation process, but is unlikely to be a panacea on its own (see here for a solid outline of potential challenges by Daily Maverick). Below, we draw lessons for Eskom’s restructuring by looking at past restructuring efforts in other countries.

Country case studies show mixed results

Aside from South Africa, Brazil, India, Mexico, Russia and Turkey have all restructured their electricity sectors in the past two decades, with varying degrees of success.

The main differentiating factor is pragmatic sequencing (i.e. starting with areas with the highest potential impact). And from that perspective, market-based pricing is a clear prerequisite for successful reforms. Without pricing reforms, the unbundling is unlikely to have much of an impact.

While reforms in Brazil, Russia, India and Turkey have resulted in an independent regulator and unbundling into three separate functions, most countries have only seen private sector participation in electricity generation while transmission and distribution remain predominantly state-owned.

Cross-country data shows that private sector participation (in generation) and the share of renewable energy (excluding hydropower) are directly proportional. This is quite evident in India and Turkey where the share of renewable energy increased from 0.3%-1.1% in early 2000s to 9.4%-12.7% in 2018 as private sector participation more than trebled over the same period.

Moreover, most renewable energy projects in both India and Turkey were developed by the private sector. Hence, the ruling ANC and South Africa’s myriad trade unions should understand that opposing private ownership, which they have advocated over the years, could also act as a barrier towards decarbonisation.

India and Turkey have also shown a remarkable drop in T&D losses following reforms in 2003 and 2001, respectively. This is perhaps the result of higher private sector participation pushing the state-owned transmission and distribution functions to operate more effectively in order to make the electricity sector sustainable, thus allowing the government to fulfil its obligations towards IPPs.

Overall, the message is mixed. While reform efforts were relatively successful in Brazil, India and Turkey, they were less effective in Russia, Mexico and South Africa (following its first attempts at reform in 2013). In any case, previous case studies provide some lessons: South Africa should focus privatisation efforts on generation, and must not shy away from market mechanisms or reform efforts will fall flat.

Other SOEs are also a drain and need to be addressed

Aside from Eskom, a number of other key SOEs are undertaking reform processes of their own. Most prominent among them is South Africa Airways (SAA), which hasn’t made a profit since 2011 and was placed under administration in December.

SAA is seeking ZAR10.5bn (in addition to the ZAR16.4bn already granted from 2020/21 to 2022/23) to implement its turnaround plan, most of which will be used to pay the severance package of up to 2,600 employees (of the current workforce of 4,600).

The plan has been significantly watered down due to union lobbying, which vehemently opposed the initial plan to cut the workforce to only 1,000 and successfully pushed for a “training layoff scheme” for an additional 1,000 workers whereby SAA will contribute up to ZAR4,650 (US$270) a month in pension, unemployment and healthcare benefits for each employee.

The NT has promised to “mobilise funding” for the plan, but has not committed to directly using state resources. The Department of Public Enterprises says that it has received interest from over 20 private sector investors to provide financing for a restructured SAA, with Ethiopian Airlines as the apparent front-runner for a potential equity injection.

If the government is successful in resurrecting SAA using private rather than state funding, it would represent a major positive step in the way the government deals with distressed SOEs and could signal greater willingness to pursue privatisation – previously a non-starter – at other troubled SOEs like Eskom.

However, Ethiopian Airlines said recently that is has no desire to deal with legacy issues such as the debt overhang and labour claims, so the government may be required to take over SAA’s existing debt stock and complete the layoff process before private investors are willing to step to the plate. In addition, unions' resistance to layoffs at an insolvent SAA does not bode well for their willingness to preemptively cut the wage bill at Eskom before its finances reach crisis levels.

Aside from SAA, the Post Office has requested ZAR4.9bn of additional support, state broadcaster SABC has requested ZAR1.5bn, state defence firm Denel has warned that it may not survive the next few months without more bailout funds allocated in the October budget, and the Land Bank asked for (and received) ZAR3bn of funding in June’s supplementary budget to meet interest obligations.

Against this backdrop, the line that NT takes on SOEs in its upcoming medium-term budget policy statement (MTBPS) at the end of this month will be a crucial sign of the government’s willingness to tackle its SOE crisis head on. Will they take a hard line by refusing to grant more state funding and pushing the onus of adjustment on layoffs and eventual privatisation, or will they expand disbursements even as state finances crumble? And what will that mean for Eskom, the real elephant in the room?

It's now or never: time to cut failing SOEs loose

In the midst of a historic economic crisis, the time has never been better for South Africa to restructure its failing SOEs and reallocate the savings to much needed social spending and debt consolidation. However, as we wrote before (here), it seems more likely that government will let the crisis go to waste.

Direct budgetary transfers to SOEs are slated to reach 2.6% of GDP over the next three years (2.2% of which for Eskom) and c0.4% of GDP annually thereafter, and this number is only likely to rise amid pending requests for further support.

Further, this figure does not include the additional premium required by investors on government debt to compensate for the risk of ballooning contingent liabilities, or the negative growth impact of poor service delivery at SOEs like Eskom that are essential to the smooth functioning of the economy.

The only way out of Eskom’s spiralling debt crisis is to undertake ambitious reforms to make it profitable and encourage private sector participation, without which it will continue to be inefficient and loss-making and to exacerbate South Africa’s broader public debt crisis.

The key reform is to make prices cost-reflective, without which future reforms will fall flat. Internal inefficiencies must also be addressed, including overstaffing, undercollection and overall mismanagement of the ageing power fleet.

In the past, privatisation has been completely taboo within ANC circles amid vehement opposition by unions. Meanwhile, the unions have continued to block necessary reforms to make SOEs more efficient, such as wage and staff reductions.

But the unions cannot have their cake and eat it too, and without greater private sector involvement South Africa’s SOEs will continue to flounder. It is time for the ANC to take a stand and make the politically difficult choices required to save its battered economy.

Eskom’s new CEO, Andre de Ruyter, has made it clear that things will not be business as usual and has made some notable progress on tackling endemic issues like corruption and mismanagement that have previously gone unchecked (see here). However, he is not the first of the 13 CEOs that have passed through Eskom’s doors in the past decade to properly diagnose its problems and set out a roadmap.

Genuine reforms will require political will, without which de Ruyter will quickly hit a wall. There needs to be a holistic rethinking by the ANC of the role of SOEs in South Africa’s economy and a willingness to break with past resistance towards private sector involvement in strategic sectors.

This month’s MTBPS, at which the NT will be forced to make key decisions on whether to provide further support to struggling SOEs like SAA, Denel and Eskom, or to instead support mass layoffs and privatisation, will be the first major signal of government’s willingness and ability to change course.

Eskom bonds show the value of a government guarantee

Aside from its impact on the sovereign, Eskom also presents some interesting questions for investors. Eskom has US$5.5bn of outstanding Eurobonds, of which only one is explicitly guaranteed by the government. The guaranteed 6.85% 28s share an issuance and maturity date with the non-guaranteed 8.45% 28s, allowing us to directly value the government guarantee. From an average of roughly 200bps pre-Covid, this has risen to c350bps today.

If government is compelled to bail out Eskom when its 21s mature in January then that spread could quickly close, resulting in substantial gains on Eskom's non-guaranteed debt. Meanwhile, if all of Eskom's debt is placed on the government balance sheet as some have suggested then the spread over sovereign could also collapse, after having risen from c50bps pre-Covid to c100bps now for guaranteed debt and from c300bps to c450bps for non-guaranteed debt.

Most importantly, however, if the attitude towards SOEs is business as usual, their collective debt crisis will continue to spiral out of control and could eventually capsize the creditworthiness of the entire government with it. However, if government uses the current economic crisis to catalyse previously unthinkable reforms like the ones referenced here, then it could begin to pull South Africa back from the brink.

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