Siseko Njobeni
30 October 2008
Johannesburg — THE global financial crisis and unfavourable credit ratings could see power supplier Eskom pay up to R120bn in interest on debt raised for its capital expansion programme, an energy analyst said yesterday.
The projection by Frost & Sullivan energy programme manager Cornelis van der Waal quantifies the extent to which the global financial crisis would affect Eskom's R343bn build programme.
Eskom has said it had to adjust its funding strategy to cope with the unfavourable global market conditions and its credit ratings.
Asked for comment last night, Eskom spokesman Fani Zulu did not reject the projection out of hand, but said, "Without seeing their model and underlying assumptions, we cannot comment on their numbers, except to note that they give a range."
He said he agreed with Frost & Sullivan that SA was not insulated from the financial crisis.
Zulu said Frost & Sullivan made a number of correct observations about the variables that would affect the build programme. "Some are on the downside, others are on the upside."
Among the downside variables were rand depreciation, access to the international markets and high costs of funding. "On the upside, the global economy will not grow at the range forecast prior to the crisis. The net result is a global decrease in energy demand. This could lead to a scaling back on the global build programme. Before the crisis, it was an equipment supplier's market. With the crisis we may see some adjustment on that," Zulu said.
The utility said last week it expected cost of funding to rise because of the global financial markets crisis. It expected the issuing of international bonds to be a challenge in the next 12-18 months, hence its decision to concentrate on the local market through the Eskom bonds.
Moody's Investor Services downgraded Eskom's foreign and local currency credit rating recently to Baa2, with a negative outlook.
"The cost of borrowing is increasing for Eskom, and thus the company will have to borrow less and still pay more interest. With liquidity challenges on top of the credit rating reduction, the cost of debt could potentially increase by between 2% and 5%," he said. This could increase Eskom's interest on loans to R50bn-R120bn.
Van der Waal said the interest was payable on R150bn over 20 years. Eskom has said it could realistically raise up to R150bn in local and international markets. The global financial crisis would put the build programme in the balance. Rand weakness and lack of funding for developing countries because of reduced liquidity in international markets would exert added pressure on the programme.
"The rand has lost more than 36%, on a monthly average basis, against the dollar since January.
"If we assume that 40% of the Eskom build programme will be spent on imported goods and equipment, the cost of the project could escalate to beyond R420bn. This is an increase in the cost of the project of 22,3%. Obviously, Eskom has put measures in place with their suppliers to stabilise the price of the equipment, but this could be offset by the currency depreciation," Van der Waal said.
Be the first to Write a Comment!
Copyright © 2008 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
