Another bail-out of the financially strapped state-owned enterprise Eskom will have dire consequences for the South African economy. This warning comes from economic experts Lerato Mothibi and Prof Danie Meyer from the North-West University (NWU).

The risk-rating agencies Fitch and Moody’s recently warned that the national electricity provider is teetering on the brink of calamity as a second multi-billion rand bail-out of R69 billion is on its way. This means that a total of R130 billion has been allocated to Eskom over the last couple of years.

Increased taxes and electricity prices are awaiting consumers, and potential investors will be further alienated by the country’s diminishing sovereign rating. 

Moody’s is the only one of the three major rating agencies that has not yet down-graded South Africa to sub-investment or junk status. If they should decide to do so, South Africa could be removed from the Citi World Government Board index.

This can result in elevated costs of debt and more exchange rate pressure. Considering that the gross loan debt of South Africa was projected to increase by R2,8 trillion, which will account for 56,2% of the Gross Domestic Product (GDP) for 2019/20, it is clear why such a step might be taken.

Meanwhile, South Africa’s borrowing requirements continue to rise to R239,5 billion as a result of lower revenue collection. The budget deficit is expected to widen, as the 2019 budget review indicates that the budget deficit would expand by 4,5% of the GDP in the financial year of 2019/20.

A downgrade by Moody’s could leave South Africa with an outflow of capital, increased exchange rate volatility and depreciating rand, which would then result in rising inflation. A downgrade could also mean that South Africa’s debt serving costs will increase, in other words the country will have less revenue to spend on social initiatives and infrastructure improvements.

“Ultimately, taking all factors mentioned into consideration, a downgrade by Moody’s is a real possibility in the coming months. Decision statements for the ratings agencies have already affected the rand recently, depreciating from R13,80 to R 14,30 to the dollar in two days,” the experts say.

“Eskom is not the only state-owned enterprise that is contributing to the country’s widening fiscal deficit. Transnet, South African Airways, DENEL and the SABC are also cited as culprits."

                           
Prof Danie Meyer                                                       Lerato Mothibi

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