Eskom liquidity injection and fiscal implications
Minister of Finance Tito Mboweni has announced additional financial support to Eskom for the current and next financial year of R26bn and R33bn respectively. This special appropriation bill for the additional amount needed by public enterprises was tabled in Parliament.
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This raises the total financial assistance from government to Eskom in the current fiscal year from R23bn to R49bn, in F20/21 from R23bn to R59bn and for F21/22 unchanged at R23bn. The conditions under which the funds are made available to Eskom, have not yet been disclosed.
But the decision was informed by “(given) the high risks of a systemic failure if Eskom were to collapse, government is urgently working on stabilizing the utility, while developing a broad strategy for its future," said Mboweni, 23 July 2019.
The former relates to the liquidity challenges faced by Eskom, as negative cash flows mean that revenue receipts are not adequate to cover operational and capital obligations.
Why was a bigger financial injection needed?
The financial assistance was also required, in the context of Eskom, to remain a going concern, to publish its financial results on 30 July and to be in a position to raise funds in the capital market.
The R69bn (R23bn p.a. for three years) financial assistance announced in the February 2019 budget was ahead of Nersa’s MYPD4 tariff announcement on 7 March 2019 which came in below Eskom’s request. Additionally, a decline in sales volumes and the high cost of primary energy and employee costs.
These have been compounded by operational challenges at Medupi and Kusile and increased midlife maintenance repair work on the old coal fired and nuclear power stations that requires more capital.
The liquidity injection is part of a larger bailout package that will include the restructuring of Eskom’s R420bn debt burden, as well the implementation of a nine point turnaround strategy and the reconfiguration of Eskom into three entities (generation, transmission and distribution).
A new Chief Restructuring Officer, yet to be named, will be instrumental and a firm mandate is pivotal. The CRO will test various options for the restructuring of debt with the ratings agencies.
The Minister of Finance also announced financial assistance to the SAGB of R3.2bn. Provision was already made in the February 2019 Budget Review in the contingency reserve account of R13.0bn, earmarked for smaller State Owned Enterprises such as SABC, Denel and SAA.
An appropriation bill to Parliament will be submitted shortly.
Implications for fiscal metrics
More government debt: The financial assistance to Eskom, however, will be felt by all South Africans. The MPC noted in the July Monetary Policy Committee meeting that “domestic growth prospects and fiscal risks ratehigh among investor concerns”.
National Treasury will provide a revised analysis of the MTEF (Medium Term Economic Frame) in the MTBPS (Medium Term Budget Policy Statement) in late October 2019 of expenditure, revenue receipts, and the budget deficit and debt trajectory.
Expenditure ceiling likely to be raised again in the MTBPS:
The expenditure ceiling was introduced in 2012 with the purpose of managing departmental spending levels to contain spending and rating. The ceiling was adhered to with two exceptions, both times related to financial assistance to State Owned Enterprises (SOE’s) – the one being in 2017 (SAA) and the other in February 2019 to Eskom and other SOEs.
Rating agencies overlooked the breaches viewed as short-term. The additional financial assistance of Eskom could add approximately R23.0bn to government’s expenditure in F19/20. Containing a rising budget deficit arising from financial bailouts to SOEs and lower revenue receipts, imply even more importance to government containing current expenditure and reviving growth.
Lower growth and tax receipts: The downward revision to GDP growth for 2019 from around 1.5% to 0.7% hold implications for government’s revenue receipts. The risk is tax receipts from personal income taxes, corporate income tax and value added tax could be revised lower.
Budget deficit to deteriorate over the MTEF period:
F19/20: Revisions to the main budget deficit for F19/20 of could be considerably higher. The February forecast was for a budget deficit of 4.7% of GDP but this could be closer to 5.8% of GDP. The wider budget deficit is likely to be funded from an increase in Treasury Bill issuance, domestic and possibly international government bonds.
There are potential sources of revenue which we have not factored into the forecast: (1) Proceeds from spectrum auction; (2) SARS efficiency gains; (3) Recovery of money lost through state capture of R14bn; and (4) asset sales.