for financial oversight of some SOCs and NTSA’s shareholder role. They regularly interact with SOCs under their remit and possess information about SOC performance valuable for credit risk assessment.<sup>12</sup> Most credit risk analyses are conducted using Microsoft Excel. NTSA is also using RiskCalc and Credit Edge software and employs third party resources, as discussed above.

# **b) Risk analysis**

Government risk managers employ various methodologies to assess credit risk, including credit rating, statistical models, scenario analysis, and structural models.<sup>13</sup> NTSA has historically relied on credit rating for credit risk assessment. To complement this methodology, NTSA has developed a scenario analysis tool. NTSA has also considered, but rejected, a modified Merton approach. All three methodologies are discussed below. NTSA’s use of credit risk assessment methodologies and risk quantification is codified in a methodology paper (NTSA, 2017).

# **i) Credit rating**

In 2009, NTSA started performing credit risk assessment of SOCs that benefit from guarantees. Initially, NTSA developed a standardized score card for all relevant SOCs. To reflect differences in risk drivers by industry, NTSA later differentiated score cards by industry. Due to significant differences in business models, risk drivers, and balance sheet items of financial institutions, NTSA developed a separate score card for development financial institutions. As part of a project supported by the World Bank Treasury, NTSA further tailored its corporate score card. NTSA has finalized a score card for the energy sector to analyze Eskom’s credit risk and developed additional sector specific score cards for aviation, infrastructure, transport, defense, and telecommunications.

NTSA’s rationale for choosing credit rating reflected various factors. A credit score card is intuitive and its outputs (credit ratings) are easy to communicate, not least because of policy makers’ familiarity with credit ratings of the sovereign by rating agencies. A credit score card is relatively easy to develop and maintain. No advanced quantitative analysis is required. Accounting skills are more important than statistics. This matches the background of staff in the Credit Risk Directorate. Also, NTSA has limited access to historical information, partly because no default of relevant SOCs has occurred in the past.

Eskom is also rated by the three most prominent international rating agencies, S&P, Moody’s, and Fitch. The credit rating undertaken by these rating agencies is considered by NTSA. However, NTSA believes the risks it is exposed to are not fully reflected in rating agencies’ assessment. Rating agencies consider the implicit and explicit government support provided as a potential reason for an upgrade. From the

> 12 The government’s role as shareholder is managed by the different government departments that are Executive Authorities for the various SOC with the Department of Public Enterprises being the shareholder for the largest SOCs including Eskom. NTSA is shareholder for some SOCs but also plays an oversight role for all SOCs. 13 See  (Bachmair, 2016) for a discussion of alternative methodologies.

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