South Africa’s credit risk in the balance as investors assess Eskom plan

A pocket-busting rescue plan for Eskom is better than no plan at all.

That seems to be the message from investors after Finance Minister Tito Mboweni on Tuesday unveiled a second multi-billion rand bailout for the struggling state-owned electricity company. That may force the cash-strapped government to increase borrowing and taxes, putting the nation’s credit rating at risk.

Even so, the cost of insuring South Africa’s government debt against default gapped lower on Tuesday, and continued the downward trend Wednesday to the lowest since April 2018. The rand was range-bound at 13.9250 per dollar by 11 am in Johannesburg, after posting moderate losses in the previous session in line with its emerging-market peers.

The limited reaction may be due to Moody’s Investors Service’s lenient tone on the matter previously, according to Citadel. The rating company assesses South Africa’s debt at Baa3, the lowest investment level, while Fitch Ratings and S&P Global Ratings have downgraded the country to junk. Also giving the government some leeway is the prospect of policy easing by the Federal Reserve and European Central Bank, which continues to support demand for higher-yielding assets.

"Moody’s stance recently has been that they will give the government the benefit of the doubt in terms of allowing them adequate time to prove policy implementation," said Mike van der Westhuizen, a Johannesburg-based portfolio manager at Citadel. "In terms of Eskom specifically they acknowledge that it will take time to turn the entity around and have not really indicated what ‘threshold’ of time they are willing to tolerate."

Rising bond yields suggest investors are starting to price in an increase in government borrowing. South African local-currency bonds were the second-worst performers in a basket of emerging-market debt tracked by Bloomberg on Tuesday, behind only Poland. But bondholders aren’t getting "too bearish in this benign global environment," said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management in London.

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