JOHANNESBURG (Reuters) - South Africa is unlikely to suffer a credit downgrade to junk in the short term, but the slow pace of reform illustrated by a logjam over ailing state power firm Eskom poses a serious risk, ratings firm Moody’s said on Tuesday.
Moody’s is the last of the top three ratings firms to still rank Pretoria’s debt at investment grade - Baa3 with a stable outlook - and has not made a widely expected downgrade.
Fitch and S&P Global Ratings already have the country’s sovereign debt on junk status, and losing the last investment grade rating could trigger a selloff of billions of rands of bonds, pushing up already soaring government borrowing costs.
All three ratings agencies have cited Eskom as the most significant threat to economic growth and the government’s ability to check ballooning debt.
On Tuesday, Moody’s lead analyst for South Africa, Lucie Villa, said lack of clarity and progress on reforming Eskom, including splitting it into three entities, was concerning.
“At the moment the issue that most illustrates that (policy uncertainty) is Eskom and what is the strategic plan to turn around the company,” Villa told a press briefing in.
In February, President Cyril Ramaphosa announced plans to split Eskom into three units - generation, transmission and distribution - to increase efficiency and manage costs.
Since then progress has been slow, with the utility losing its tenth chief executive in as many years and Ramaphosa’s plan facing loud opposition from powerful trade union federation Cosatu.
In August a strategy paper published by National Treasury that raised the idea of selling Eskom’s coal-fired power plants was also rejected by Cosatu and some factions inside the ruling African National Congress.
The government said last month it would soon publish a paper on plans for the separation and how to wean Eskom off bailouts that threaten to push public debt beyond the 60% debt-to-gdp ratio seen as a red line by credit agencies.
“For us the key is to understand what is the official plan that all key stakeholders agree to. That everybody is on the same page with. If that were the case we would have something credible and visibility about the long term strategy.”
The Treasury has already earmarked 26 billion rand (1.38 billion pounds) to Eskom in the financial year which ends in March 2020 as part of special legislation to inject 59 billion rand over two years. That is on top of a 23 billion rand a year bailout for the next three years.
Eskom has, however, warned the money may not be enough to meet operating costs and climbing debt-servicing payments. The firm also warned last week it could not rule out another round of power outages.
Moody’s said while it had trimmed its economic growth forecast for 2019 to 0.7% from 1%, its stable outlook on debt meant that a downgrade to sub-investment was unlikely in the near term.
“At the political level, as things stand in terms of policy orientation, we still see a very reform-oriented executive which is why we still believe there is still some prospects of a pick-up in growth,” Villa said.
“From a credit perspective the main downside risks are actually to the longer-term perspective, so more from about 2020 to 2021 and beyond. And here we maintain our expectation of growth of 1.5%”.
Africa’s most developed economy recorded better than expected growth of 3.1% in the second quarter following a deep first quarter contraction, but analysts fear maintaining growth at that level is unlikely.
On Tuesday data from the national statistics agency showed manufacturing output fell 1.1% year-on-year in July after a 3.6% contraction in June, underlining the fragile state of the economy.
Additional reporting by Nqobile Dludla; Editing by Catherine Evans and Andrew Cawthorne