South Africa's Energy Unit Eskom in danger of collapse without bailout

Feb 14, 2019

South African power utility Eskom needs a cash injection by April to survive, the country's public enterprises ministry warned in a presentation on Wednesday, although it later changed its wording to say the firm was "facing liquidity challenges".

State-owned Eskom, which supplies more than 90 percent of the power in Africa's most industrialised economy, cut electricity for a fourth straight day on Wednesday.

Eskom is laden with more than $30 billion (23 billion pounds) of debt and is battling a shortage of capacity that threatens to derail government plans to lift the sluggish economy.

President Cyril Ramaphosa said last week that the government would support Eskom's balance sheet but said details would be announced in a budget speech by the finance minister on Feb. 20.

The department of public enterprises, which oversees Eskom, said in a presentation to parliament that Eskom was technically insolvent and would "cease to exist" at the current trajectory by April, unless it gets a bailout.

The ministry later sent a version of the same presentation to journalists which it said had been corrected, which removed the timeframe and in which it substituted the words "will cease to exist" with "is facing liquidity challenges". A ministry spokesman did not answer calls seeking an explanation.

Analysts say Eskom no longer generates enough cashflow or earnings to meet its debt-servicing costs, putting it at risk of default.

Public Enterprises Minister Pravin Gordhan, however, ruled out privatisation of the utility.

Fears over Eskom's financial viability drove the rand 1.5 percent weaker against the U.S. dollar.

The yield on the benchmark government bond, which moves inversely to its price, was up 2.5 basis points as investors fretted about the economic impact of a crisis which could see South Africa lose its remaining investment grade credit rating.

"With Eskom in the midst of trying to find a solution to its financing needs, investors are more nervous as to what this means to (rating agency) Moody's," Citi economist Gina Schoeman said in a note.

"Markets are highly sensitive to even a negative outlook decision because of how close this places South Africa to a WGBI-exit and inevitable ZAR depreciation and increased vulnerabilities," she added, referring to the World Government Bond Index (WGBI).

Moody's, the only one of the "big three" agencies to rate South Africa at investment grade, is scheduled to review the sovereign on March 29.

South Africa is rated "junk" by S&P Global Ratings and Fitch and if Moody's joins them, the country will be booted out of the WGBI, which may prompt investors to dump its assets.

FRUSTRATION

The public enterprises department said on Wednesday that Eskom was struggling to keep its mainly coal-fired plants running due to coal shortages and poor maintenance, with 40 percent of breakdowns a result of human error.

The cash-strapped company said it would cut 3,000 megawatts (MW) of power from the national grid from 0600 GMT on Wednesday, likely until 2100 GMT. This follows a similar cut on Tuesday and 4,000 MW on Monday in the worst power cuts seen in several years that drove the rand currency down on Monday.

The power cuts have led to frustration among ordinary South Africans with traffic gridlock in major cities during rush hours as traffic lights stop working and some mothers struggling to feed their children.

"I have a baby, so making her bottles was a challenge because I had nowhere to boil water, which resulted in me having to go to a restaurant that has a generator just to get boiling water," 28-year old Anazi Zote, mother of a 10 month-old daughter, told Reuters.

Business owners with no access to backup power sources have also been hit.

"From work to home to everywhere. At the moment the lights are off and we are using the stairs because the elevator isn't working, and I'm on the 11th floor … it's frustrating," Leroy Erasmus, 25, a risk and surveying consultant, told Reuters. 

Firms in the mining sector, the backbone of the country's economy, are looking at alternatives to reduce their dependence on Eskom and monitoring the situation closely.

"Extended load-shedding (power cuts) would have a severe impact on the viability of mines, particularly deep-level gold and platinum mines," said Charmane Russell, a spokeswoman for South Africa's mining body.

Harmony Gold said on Tuesday that it was in talks to build a 30 MW solar plant to supply power to some of its assets, in an effort to cut its electricity costs and dependence on Eskom.

Gordhan said the government was worried about the impact the power outages could have.

"The Eskom board is taking steps to ensure that load shedding (power cuts) doesn't become a permanent feature of South Africa this year," he said.

 

- Reuters

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