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Zuma or Ramaphosa, does it really matter?

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - South African state-owned enterprise (SOE) Eskom is one of the world's biggest utilities, generating approximately 95% of the country's electricity and about 45% of the power used across Africa. This week, an internal presentation that was leaked to the public following an executive forum raised hard questions about the company's viability.

      With Eskom debt accounting for roughly 17% of total sovereign debt, an Eskom collapse would be catastrophic for South Africa. After years of struggling to cover costs and interest payments for large amounts of outstanding debt, Eskom is being bailed out by the government. That bailout has contributed to deeper budget deficit projections and pushed public debt well above 50% of GDP.

      Seeking a sustainable solution

      On August 22, acting CEO Jabu Mabuza presented Eskom's strategy to a group of about 600 senior Eskom managers and executives.1 The presentation states unequivocally that "Eskom in its current form is unsustainable." The company must borrow to service its debt, revenues are declining, labor and coal costs are increasing and the business model is outdated - putting it into a "utility death spiral."2

      Given that the potential consequences of Eskom's collapse would be dire - sharp depreciation of the rand (ZAR), downgrade of the credit rating to junk status, sell-off of South African bonds, international bailout - the three-pronged turnaround plan puts responsibility on both Eskom and the government to: 

      • Stabilize by improving governance, profitability and electricity reliability
      • Separate the company's operations into three entities for generation, distribution and transmission
      • Grow by lowering the carbon energy mix, expanding renewables and the customer base

      South Africa has experienced intermittent power outages for years, as Eskom's infrastructure has been poorly maintained and the utility has struggled to meet demand. Power blackouts have been rumored to be acts of sabotage, and this employee-leaked presentation could increase these suspicions. From our perspective, there's no time to waste putting Eskom on a sustainable footing.

      Bottom line: We have long been critical of South Africa's policies and fundamentals, as evidenced by declining revenues, rising expenditures, higher debt and failing SOEs under both presidents Zuma and Ramaphosa. This leaked document highlighting the existential threat to Eskom is just the latest reminder that South Africa faces enormous challenges.