While much of 2016 was dedicated to junk avoidance, the risk of a downgrade persists, with both Fitch Ratings and S&P Global to decide this year whether to designate the country as ‘stable’ or to downgrade it to junk.

South Africa’s unstable political climate, together with the country’s poor growth performance and weakening fiscal balance, poses the greatest downgrade risks. However, the contingent liabilities associated with guarantees to State-owned companies (SoCs) such as Eskom have, for S&P Global at least, emerged as a “pressure point” for South Africa’s sovereign rating.

Associate director and sovereign ratings analyst Gardner Rusike says the combination of rising government debt and the higher use of guarantees by Eskom and other SoCs has the potential, unless contained, to “impact negatively on the creditworthiness of the sovereign”.

A guarantee is a commitment by government to take responsibility for a loan in the event of a default and is extended to enable SoCs to access funding that would otherwise be unavailable, or to borrow at rates that reflect lower risk premiums.

The National Treasury reported in February that guarantees to public institutions are expected to increase by R7.8-billion, from R469.9-billion in 2015/16 to R477.7-billion in 2016/17. It added that Eskom was expected to use R43.6-billion of its guarantee in 2016/17 and R22-billion yearly over the subsequent three years.

However, Rusike notes that there has been deterioration, between the 2016 and 2017 Budgets, in the use of guarantees by Eskom, which grew at a faster pace than the National Treasury had initially assumed would be the case.

He is particularly concerned that Eskom may need to draw more aggressively on guarantees in light of recent “negative tariff decisions” by the National Energy Regulator of South Africa (Nersa), as well as prevailing legal uncertainty about the electricity utility’s access to the Regulatory Clearing Account (RCA) to recoup revenue that has been incurred prudently outside that approved in the tariff.

On February 23, Nersa approved a 2.2% Eskom tariff increase for 2017/18 and reaffirmed that any over- or under-recovery could be dealt with through the RCA mechanism. However, it acknowledged that its ability to consider RCA applications had been affected by the Gauteng High Court’s August 16 ruling, which determined the most recent RCA adjustment to be “irrational, unfair and unlawful”. Nersa is appealing the judgment, and will refrain from adjudicating further RCA applications until legal certainty is established.

Various processes are under way to find a way to support Eskom in light of the current RCA uncertainty. “But the reality is that Eskom is under pressure and they are requiring more support from government . . . more than what government had actually budgeted for. It is hurting Eskom for now, but it could eventually hurt government’s balance sheet.”

A number of other governments, including Mozambique recently, have been forced to step in and assume SoC obligation. “So, it’s a pressure point for us when we combine government debt, which has been rising, with these contingent liabilities,” Rusike says.