South Africa’s and Eskom’s Debt Trap

South Africa’s and Eskom’s Debt Trap

South Africa’s and Eskom’s Debt Trap
South Africa’s and Eskom’s Debt Trap – The Pivot To Change this Democracy?

Anyone that has been caught in a debt trap, or has been short of cash to meet their monthly expenses will understand the vulnerability that position evokes.

South Africa is progressively heading towards that uncomfortable position.

Every day the news breaks with more allegations of corruption against JZ and his cadres.

Yet despite all the constitutional court rulings, all the exposure, joining the dots, and emails, the top of the ruling party remains invincible. The question everyone is asking is how long will it go on? With a record of Houdini type escapes, the end answer may only be the 2019 national elections.

But despite JZ’s giggling and all the attempts to remove him, there are forces at play that involves large numbers, an area he is clearly not good at, which maybe the deciding pivot to alter South Africa’s current democracy.


WHERE WE WERE, AND ARE HEADING


Already in a recession and 2 successive quarters of negative growth, (at July 2017) there is little reason to believe that it is going to get better in the short term.

Looking at trends, manufacturing output has fallen from 24% of SA’s GDP in 1980 to less than 13% of GDP in 2015, and is even lower now. Resources in the mining sector tell a similar story, with GDP falling from 21% in 1970 to 6% in 2011, and again much lower today.

Simultaneously unemployment has persistently been rising from 16,7% in 1995 to over 27% in 2017.

The rising cost of energy has been a contributor to dampening growth. Over 500% increases (depending on tariff types) since 2004 has reduced manufacturing and resources competiveness. The knock on effect down the daisy chain is evident in all sectors.

With South Africa having been marked down to junk bond status, and more downgrades almost certainly on the cards before the end of 2017, what will this mean for the country?

Investment inbound flows will slow, outbound flows will increase dramatically and government borrowing will become much more difficult and indeed expensive.

Simultaneously tax revenues into SARS will fall, VAT receipts will slow, lower consumer spending will result in long established businesses contracting or closing.

Add in the high probability of the Western Cape running out of water by October, and areas such as tourism will be severely hit.

Unlike the technical recession in 2009, South Africa’s position in today’s recession is not attributable to overseas events but internal policies and mismanagement.

Sooner or later, as the SA economic position deteriorates, South Africa will run out of borrowing opportunities. ‘State Capture’ and corruption has already damaged South Africa as being a respectable and trustworthy borrower.

A bail out of the SA government is an increasing probability; it is really just a question of when.


EAST (BRICS) OR WEST (IMF)?


Who will South Africa turn to for money, the East (BRICS) or the West (IMF)?

Initially probably the EAST, but China’s economy is slowing, and Africa does not hold as much appeal as a few years ago.

Brazil is of course a non-starter, Russia is in a bad way, and India is focused internally, enjoying significant growth.

If China is not interested, or the conditions imposed are too onerous, where does South Africa look next? Almost certainly they will reluctantly turn to the West and the International Monetary Fund (IMF).

(The IMF’s objectives stated in the Articles of Agreement are: to promote international monetary co-operation, international trade, high employment, exchange-rate stability, sustainable economic growth, and making resources available to member countries in financial difficulty).

Negotiations between South Africa and East and West funding opportunities, moving from one to the other, and back again to and fro, is likely to be difficult.

Whoever comes to the party, in light of the prevailing sentiment, the conditions are likely to be stringent.

Potentially as in Zimbabwe, the begging bowl is left ‘empty’ unless changes are made.

Money is not going to be lent, unless the lender is confident it will not disappear into a bottomless pit.

South Africa’s debt trap, the terms and conditions of the loans, will almost certainly require a restructuring at the top of South Africa’s ruling party.


ADD IN THE NUCLEAR DEBATE


The scale of the scandals within SABC, SAA, SASSA, Transnet, PRASA, DENEL, and others are all sideshows when compared to Eskom.

Although the scandals are staggering in their brazenness, they will all pale into insignificance when compared to a nuclear program.

The government has, despite losing in the courts, embarked upon the next rapid round to get nuclear deals signed by the end of the year.

What possible reason can there be to actively pursue nuclear today unless its motivation is subversive?

Today in 2017, we have a surplus of electricity, with electricity sales down to 2007 levels. Such a surplus has enabled Eskom to enter into sales within the Southern African Power Pool, including Namibia, Botswana and Zimbabwe.

The IRP 2016, expected to be signed by March 2018, suggests that nuclear will not be needed before 2037, and independent analysis by parties such as the CSIR says not before 2050. The lowest cost options involve renewables, some coal and gas.


ESKOM IS ALREADY IN THE DEBT TRAP


With falling revenues and increasing costs, higher financing charges from being marked down to junk status, additional capital expenditure on Medupi and Kusile, more power coming on line, ESKOM face greater surpluses of electricity, and less revenue.

To compensate they need to raise electricity prices even more. Already the approaches to Nersa suggest at least 20% for 2018, and with their increasing costs, no doubt this will follow every year thereafter.

As well as being highly detrimental to all consumers at home, and in particular the poorer in society, it will raise the costs of industry and resources, as well as all other sectors of the economy, making South Africa increasingly uncompetitive against overseas.

Add in nuclear to this, with Eskom being tasked with raising the finance, and the financial equations look dire.

Of course the threat is that South Africa’s power could, if the Russians come into finance nuclear, result in the country being beholden to them for decades, rather than the East or Western lenders.

But if government is forced into a bail out from East or West, no doubt one of the conditions, with Eskom being owned by the government, is whether the country embarking on a nuclear program is really a sensible option?


RENEWABLES


In the overall picture today, a side show (relatively speaking) will be the growth of renewables.

Large scale utility PV and wind farms have almost certainly been killed off by government (37 REIPPP preferred bidders will remain unsigned for the foreseeable future).

Government preference is nuclear, based on biased false facts about renewables and erroneous assumptions on nuclear plants.

But while large scale renewables (wind, PV, CSP) faces an uncertain future, the same is not true for the disruptive technologies of solar electric rooftop PV for commercial applications, and for solar water heaters in both the domestic and commercial sectors.

It is just a question of the maths. When does it make economic sense for the end user to go renewable? The answer - When it is cheaper than buying electricity from Eskom and the resellers being the municipalities.

That point has already arrived with solar water heaters, and also with some rooftop solar PV, for example in shopping malls.

This in turn will put even more upward pressure on electricity prices.

In the full cycle of the debt trap, Eskom’s problems will progressively get worse.


IT LOOKS DIRE, BUT


C

an the economic position improve? The answer is of course ‘yes’, but it will take change at the top of the ruling party, or a change of government. As we all know as consumers, the bankers can force us to change if we find ourselves in the debt trap.

Renewables are in many respects one of the only bright lights on the horizon.

A revised energy policy in conjunction with invoking prudent fiscal and economic policy, can reverse the current trends, resulting in more foreign investment, more jobs and job opportunities, and more poverty alleviation. Certainly it is going to be tough for some time, but the pivot to change (the debt trap) is rapidly approaching.

Ubersolar is passionate about renewables, saving consumers money, and helping climate change mitigation. GET A QUOTE on the most competitive solar systems in South Africa today.