EDITORIAL: Interest rates are important, but what does the Bank really think about Eskom?
As in previous monetary policy committee meetings, Bank governor Lesetja Kganyago isn’t likely to tackle this big elephant in the room
Questions about Eskom’s health, or lack of, are never that far from the surface when the Reserve Bank announces its interest-rate decisions. That will probably prove true on Thursday when the monetary policy committee concludes its latest meeting.
But as in previous meetings, governor Lesetja Kganyago isn’t likely to tackle this big elephant in the room directly, and when he reads out the committee’s decision, he is likely to stick to broad warnings about the potential impact of recent tariff increases on the inflation outlook
The wording probably wouldn’t have changed much from the previous meeting in March when the Bank talked about key upside risks being “rising administered prices including electricity and water tariffs”, together with domestic food prices and international oil prices.
While “electricity constraints” figured among the risks to growth — it would be strange if they didn’t as the period prior to that gathering had been dominated by sustained blackouts — this was in general terms.
Kganyago was reluctant to get into specifics and, when asked, was dismissive of private sector economists and their forecasts on the impact on growth. Most of the analysts who had ventured opinions and forecasts, he said, had sucked the data out of their thumbs.
Considering what we know about Eskom now and the clear and present danger it poses to the economy, it seems like the days where we can see it as merely posing dangers for the inflation outlook are long gone. Eskom informed the market last week that its debt is now R440bn and it must raise another R45bn in 2019 to continue its build programme.
It’s well accepted in the markets now that the R23bn-a-year bailout from the government, which it hasn’t been able to access fully since parliament finished its last session without passing the necessary legislation, plus the tarriff granted by the electricity regulator, won’t be enough to get it into a sustainable position.
Eskom’s situation is so dire that Moody’s Investors Service has now decided to calculate the government debt as if Eskom’s guaranteed debt is already on the government’s own balance sheet.
This means that the sovereign’s debt-to-GDP ratio is now at a massive 63% and set to go to 70% in only a few years. The situation is even more dire if the debt of other state-owned enterprises is included, which, according to Moody’s, would add another 10 percentage points.
On top of this, there is a realisation among most observers that the government hasn’t come to grips with the situation or shown that the people in charge have a plan. At least one that can inspire confidence that we are past the worst.
Finance minister Tito Mboweni is well liked by investors because he tends to say the right things. The same applies to public enterprises minister Pravin Gordhan, loved for his principled stance against corruption and state capture. But do they really have anything resembling a plan that can rescue Eskom?
It’s been more than a year since a new board and CEO were put in place and when Eskom does finalise and eventually release its financial results, they are likely to show that things have gotten worse, not better.
Therefore for most South Africans following this disaster, the question of whether interest rates stay the same, or are adjusted by 25 basis points, will seem almost academic. Inflation numbers that came out on Wednesday, confirming that the annual rate of change in the consumer price index dropped to 4.4% in April, near the mid range that the Bank seems to have adopted as an unofficial target, won’t change that.
Since the government has been less than candid about Eskom’s crisis the country is crying out for a proper analysis of the impact that the possible failure of Eskom will have on the economy.
Of course we all remain concerned about Eskom’s effect on the inflation outlook but it seems that will be the least of our problems.