Eskom and other state-owned companies played the biggest part in S&P downgrade
Two of the three big global ratings agencies have now given a junk rating to rand-denominated government bonds
SA’s credit rating is now officially junk thanks to the poor balance sheets of Eskom and other state-owned companies.
S&P Global Ratings downgraded South African rand-denominated government bonds to BB+ from BBB-on Friday night. This followed repeated warnings by the ratings agency that the government standing R350bn surety for the state-owned power utility’s spiraling debt was unsustainable.
"Over the next six months, we anticipate that appropriations may be required to shore up Eskom’s very weak financial position. Eskom already benefits from government guarantees of nearly 8% of GDP," it said on Friday.
It estimated overall public sector debt at 71% of GDP in 2017.
S&P’s move places its credit rating of SA’s local currency debt on the same level as Fitch’s, meaning two of the three big global ratings agencies have given a junk rating to rand-denominated government bonds.
Reserve Bank governor Lesetja Kganyago recently warned that a consensus view by credit rating agencies that SA’s local currency bonds are junk could result in index tracker funds selling up to R180bn of them.
When S&P cut South African foreign-denominated government bonds to BB+ from BBB-on April 3, it flagged Eskom as a huge concern, signaling that it would also cut SA’s rand-denominated bonds to junk if nothing was done about the utility whose creditworthiness S&P rates three rungs down the junk ladder at BB-.
Fitch, which on Thursday affirmed its BB+ with stable outlook rating it made when it downgraded SA from BBB-on April 7, raised similar concerns in its report.
Fitch warned SA’s "capacity to provide financial support to distressed state-owned enterprises may be declining".
"Due to concerns over governance, many creditors of state-owned enterprises have stopped rolling over existing facilities leading to liquidity pressures, notably at Eskom, the main electricity supply and distribution company. The plan for large investments in nuclear power generation is still progressing, despite some legal setbacks. This could lead to a large further increase in government guarantees over the long term," Fitch said in its statement.