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Eskom is the biggest single risk to South Africa's economy

Eskom came dangerously close to having its bonds suspended by the JSE and to defaulting on debt and other obligations, when the release of its interim financial statements for the six months to the end of September 2017 was delayed in January this year.
Photo: Eskom
To compound matters, the power utility issued a JSE stock exchange announcement earlier this week warning its bondholders that there may be more bad news relating to irregularities when Eskom releases its financial results for the year ended March 31, probably later this month. The disclosure on the quantum of the uncovered reportable irregularities and irregular expenditure would be published with the release of the company’s annual financial statements.

After Eskom secured commitments of support from certain banks, its auditors issued an unqualified review but with an “emphasis of matter” on its ability to continue as a going concern for the next year to 18 months. Eskom’s liquid assets dwindled to R9bn at the end of September from R30bn the year before, as a result of flat revenue caused by falling sales and lower-than-anticipated tariff increases.

The new chairperson of Eskom, Jabu Mabuza, recognised at the time that the overriding problem at Eskom — apart from governance — was the company’s R360bn debt burden. At the end of September 2017, its gearing ratio (debt to equity) had risen to 72%. He said that Eskom’s debt levels were simply “unsustainable”.

Serious concerns

The latest announcement raises serious concerns. Eskom spokesperson Khulu Phasiwe explained that as part of the JSE debt listing requirements, Eskom had to inform bondholders about the looming disclosure of irregularities because its bonds were listed on the bourse. Eskom’s auditors qualified its results for the year ended March 31 2017, because they could not express an opinion on the completeness of the irregular expenditure reported in the results. They also said that they had identified reportable irregularities in Eskom’s financial results for the six months ended September 30 2017.

The announcement was made against the background of Finance Minister Nhlanhla Nene daring Eskom unions to table proposals on how the fiscus can foot the bill for wage increases when they meet with him. This was after the National Union of Mineworkers (NUM), Solidarity and the National Union of Metalworkers of SA (Numsa) had sought intervention from Nene and Public Enterprises Minister Pravin Gordhan after they failed to reach an agreement on wage increase with Eskom earlier this week.

Three weeks ago, Nene commented during an investor road show in the UK that there was no money to bail out Eskom to help the entity with the salary hikes. Speaking during the World Economic Forum roundtable, Nene said Eskom posed a serious challenge to attracting investment in SA. Gordhan warned earlier this year that major international investors refused to buy bonds from Eskom because of bad governance and rampant corruption. Goldman Sachs said in September 2017 that Eskom is the biggest single risk to South Africa’s economy.

Eskom depends on government support to service its R368bn of debt. It needs R72bn of funding until the end of 2019, including the refinancing of a R20bn loan obtained with a government guarantee, according to a March report published by Moody’s Investor Services. A default on its debt would be catastrophic for the South African economy as it would trigger cross defaults of all government debt. Developments in the next weeks will be keenly watched by international and South African investors alike.”
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About the author

Ian Matthews is the head of business development at Bravura