The rand weakened on Thursday as Moody’s Investors Service, the only major rating company that still assesses South Africa at investment grade, warned a decision to more than double state financial support for Eskom is “credit negative.”
While the government may try to absorb some of the costs of the bailout for the cash-strapped power utility in the mid-term budget in October, the “room to manoeuvre is extremely constrained,” Moody’s said in a report on its website. The rand was the worst-performing emerging-market currency against the dollar and government bond yields climbed as the comments stoked speculation the investment-grade status may be at risk.
“The additional support to ease the company’s financial pressures would be credit negative for South Africa because it would be an additional drain on fiscal resources,” Moody’s said. “The lack of a strategy to return Eskom to a more stable financial situation that would reduce the need for government support exacerbates the problem for the government.”
Finance Minister Tito Mboweni this week announced a second multi-billion dollar package for Eskom within five months, aid that may force the Treasury to increase borrowing and taxes. The 59 billion-rand ($4.2-billion) cash injection over the next two years adds to the three-year, 69-billion-rand bailout unveiled in the budget in February.
Burdened with more than $30 billion of debt and struggling to meet demand for power from aging plants, Eskom is seen as the biggest risk to Africa’s most-industrialized economy. A cut to junk at Moody’s, which has a stable outlook on South Africa’s Baa3 rating, would exclude the nation’s bonds from some global indexes, leading to an outflow of funds.
The extra money for Eskom raises the likelihood of upward revisions in both the government’s spending ceiling and the budget deficit in October, Moody’s said. Eskom may still need more help to shore up its balance sheet, including a possible debt transfer or an increase in state guarantees for the utility’s debt, it said.
No Clear Strategy
“No clear strategic turnaround plan agreeable to all stakeholders has emerged yet, fuelling risks for the government of having to provide additional support,” Moody’s said.Morgan Stanley analyst Andrea Masia estimates the budget gap could widen to about 6.4% of gross domestic product in the current fiscal year, taking into account the rescue package and weaker-than-expected tax revenue. The Treasury forecast a 4.5% shortfall in the February budget.
“A significant deterioration in debt and deficits will not be ignored by Moody’s,” said Natalie Rivett, senior emerging-markets analyst at Informa Global Markets in London. “This all reinforces our view of downside risks to the rand into year-end.”
The rand erased earlier gains after the report, sliding as much as 1.4% against the dollar. It traded 1.1% weaker at 14.0317 per dollar by 4:39 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 climbed eight basis points to 8.17%.
Eskom is planning a non-deal roadshow a week after the release of its annual results, Ksenia Mishankina, a senior credit research analyst at Union Bancaire Privee, said in a note to clients. The company said earlier this month that it planned to report full-year numbers at the end of July.