Mboweni delivers sober budget weighed down by Eskom

Finance Minister Tito Mboweni delivered some very hard messages in his maiden Budget Speech today.  None of it came as a surprise.  However, as the ANC has shied away from facing any of these issues over the last decade, the real surprise lay in their willingness to do so just months before a national election.

 

Deficit worsens as Eskom is included

 

While it was widely expected that a significant allowance would need to be made for Eskom, the view was that government would take over a significant portion of the debt. Contrary to expectations, National Treasury have taken this through normal expenditure, thus adding roughly 0.4% to the main and consolidated budget deficits in each of the next three years.  Without the Eskom charge, the main budget deficit would have narrowed to 4.2% of GDP in financial year 2019/2020 instead of the rather scary 4.7% published. 

 

National Treasury is unwilling to take on the debt as they believe it would incentivise the wrong behaviour.  The purpose of the support is to ensure that Eskom can pay its debt; they will not be able to use it to make operational payments. 

 

National Treasury has therefore made it clear that they are confronting the challenge posed by Eskom head-on.  After consulting rating agencies, the advice they received was that “if you are going to do something, do it transparently.” 

 

Will it be enough to appease the ratings agencies?

 

While National Treasury indicated that they had engaged with rating agencies on Eskom ahead of the Budget, we believe a far more plausible plan on Eskom’s turnaround is required in the next few weeks to prevent Moody’s from moving SA’s outlook to negative at their March update.  Moody’s noted after the State of the Nation Address that the SA government taking on Eskom liabilities (either directly or indirectly by providing support) would only be viewed as neutral if it were accompanied by an immediate cost-reduction plan that could be implemented imminently.  This needs to be produced. 

 

Focus on using the private sector

 

Driven by the absence of other options, the government is increasingly focusing on using private sector skills and funding to provide infrastructure.  Given that the latest renewable round saw electricity pricing reasonably below that of estimated Kusile costs, future generation will be built by the p