There’s still time to turn Eskom around, says Citi

South Africa still has time to reverse the damage caused by the country’s state-owned power utility, which struggles to meet supply and has been a burden on the nation’s finances, said Peter Crawley, Citibank NA’s country officer for South Africa.

While Eskom’s costs are too high and it has suffered from poor leadership and a strategy-implementation failure, there is a good opportunity to turn the utility around with the government’s support, Crawley said in an interview Thursday in Mozambique’s capital, Maputo.

“It is a big risk to our economy but equally it should be a relatively straight-forward win,” he said. “It’s just a matter of execution and willingness.”

South Africa’s economy contracted the most in a decade in the first quarter as power cuts curbed output. President Cyril Ramaphosa’s office has said he will announce measures to ease the crisis at Eskom, which supplies most of the country’s power, has wracked up almost R500 billion in debt and is at risk of insolvency.

Key insights from the interview:

On Eskom’s debt: “It’s a more complex matter because some is guaranteed, some is not guaranteed and some of the not guaranteed is spoken about as implicitly guaranteed but differently priced. Negotiating with debt holders can be a costly exercise if not done in the right way. It is really important to get the plan right because there is not much to present to debt holders and investors if you don’t have an operational plan that is feasible. We’re putting the cart before the horse, we’re talking about debt restructuring but we still haven’t got clarity as to the execution plan.”

On the pace of economic and policy reforms: “Markets have already responded to the slow execution post the election and you can see that in the risk premia of the bonds and the rand. The biggest challenge is the expectations of the market are very different to the ANC process timelines. Right now, we’re seeing investors sit on the sidelines and the clock is ticking.”

On South Africa’s sole investment-grade credit rating from Moody’s Investors Service: “Moody’s has given the benefit of the doubt to President Ramaphosa in terms of execution against what is clearly a well thought out set of objectives. The question now is how quickly and how deeply and how much resistance he’ll face along the way. Moody’s will review again on November 1; the country will be measured based on what happens between now and November, so there is time, but not a lot. This is crunch time.”