December 7, 2018 / 1:30 PM / in 4 months

Eskom bailouts key to South Africa credit rating, says Fitch

LONDON (Reuters) - South Africa’s credit rating could be cut further if a $7 billion bailout of state-run power utility Eskom is the start of a trend, Fitch’s top analyst on the country said on Friday.

The logo of state power utility Eskom is seen outside Cape Town's Koeberg nuclear power plant in this picture taken March 20, 2016. REUTERS/Mike Hutchings

Fitch kept South Africa’s rating at ‘BB+’ with a stable outlook at a review on Thursday, but its head African analyst, Jan Friederich, said there were a number of Eskom issues that could potentially change that.

The loss-making utility needs a bailout. It hopes the government will absorb 100 billion rand ($7.08 billion) of its debt, but it has 420 billion ($29.72 billion) altogether which is roughly 10 percent of South Africa’s annual GDP.

“If they just bail out Eskom without a significant improvement of operations the risk is that they will just have to continuously do that,” Friedrich told Reuters.

Pumping more money in would then make it difficult to turn around the country’s fast-rising debt level, something that Fitch’s current rating and stable outlook is based on.

“Some rise (in the government debt level) is incorporated but the failure to stop that rise would be a clear problem.”

“That transfer of 2 percent of GDP, the 100 billion rand, would probably not require any (rating) change. But it would need to be analyzed in terms of what it means for the wider debt trajectory.”

Any sign that Fitch could move South Africa’s rating or outlook again will put focus back on Moody’s, whose investment grade rating has kept the country’s rand-denominated debt in the key global bond indicies which attract investors.

Friedrich said upcoming elections were another factor likely to make cutting spending or jobs at big state-run employers like Eskom, difficult.

“It will be a little bit difficult over the next year given the political calendar.”

“The budget will be out in late February and the elections are likely to be in May, so it will be difficult to announce measures that will clearly stabilize the debt trajectory,” he said.

Editing by Janet Lawrence

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