In the World Bank’s tenth and most recent ‘South Africa Economic Update’, the risk of “fiscal slippage” is highlighted as arguably the country’s most worrying immediate downside risk. The report points to signs of revenue undercollection amid ongoing upward expenditure pressures as the 2019 election nears. The report also highlights the threat of contingent liabilities, associated with State-owned companies (SOCs), becoming on-Budget liabilities. Should this occur, it will seriously undermine or delay South Africa’s fiscal consolidation efforts. Such slippage would likely trigger additional downgrades by the credit ratings agencies, which would, in turn, increase the cost of public debt, crowd out social expenditure and place pressure on the rand.

As the October 25 Medium-Term Budget Policy Statement approaches, attention will undoubtedly be paid to the risk of fiscal slippage, particularly where such slippage is precipitated by the SOCs. Much of the initial focus will be on South African Airways (SAA), which controversially received a further R3-billion at the end of September to repay a R1.8-billion Citibank loan and bolster working capital. The intervention probably had as much to do with preventing contagion spreading to other SOCs as it did with extending another lifeline to the embattled national carrier. That’s because the National Treasury is coming to realise that the main SOC storm brewing is not SAA, but Eskom.

The power utility’s debt stood at an eye-watering R355-billion at the end of March and is expected to peak at close to R500-billion. Disturbingly, Eskom’s position to repay this debt without further assistance (the utility has received substantial government support over the past ten years in the form of equity, as well as a R350-billion guarantee facility) is looking weaker by the day. Besides the real and reputational costs associated with corruption and inefficiency, Eskom’s real problem is one of unsustainability.

This lack of sustainability arises as a consequence of a lack of demand for Eskom’s product, which is occurring at a time when the utility has invested and borrowed heavily to make more. There has been sharp divergence between expected electricity demand and actual sales. Five years ago, Eskom had budgeted sales of around 244 300 GWh for 2017, while it now expects to sell only around 212 000 GWh, well below the 2006 peak of more than 224 700 GWh. The prospect for increased sales is likely to be undermined further by the utility’s request for a 19.9% tariff hike from April. Indeed, energy-intensive firms warn that this will accelerate the downward sales spiral.

The problem is that Eskom and government are between a rock and a hard place, because, without the hike, the risk of fiscal contamination becomes all the more real. The utility’s own modelling, included in its most recent tariff application, shows that, if it were to receive only 8% for the foreseeable future, government’s debt-to-gross domestic product (GDP) ratio would reach 75% by 2021 and 104% by 2030. By contrast, under the 19% tariff scenario, the debt-to-GDP ratio stabilises at around 66%. Eskom cautions that, absent a major tariff hike, the utility and government will be forced to turn to the only other sources of funding available: issuing more debt, raising additional tax revenue, or diverting expenditure away from other government services.