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After Eskom bailout, focus shifts to South Africa's credit rating

At 1700 GMT, the rand was trading at 14.0200 per dollar, little changed on the day. The yield on the benchmark 2026 bond dipped 2 basis points to 8.82%.

Credit rating agency Standard & Poor's. Picture: AFP

CAPE TOWN - Ratings agencies signalled their concern with South Africa’s budget on Thursday, saying a R23 billion a year bailout for struggling state utility Eskom exemplified growing strain on the public purse before an election in May.

Finance Minister Tito Mboweni on Wednesday painted a bleaker outlook for economic growth and debt in his maiden budget speech, whose centrepiece was a pledge to give Eskom R69 billion over three years to avert its collapse.

A senior finance ministry official told Reuters on Thursday that Eskom’s support package could grow to 150 billion rand over 10 years.

The bailout forms part of efforts by President Cyril Ramaphosa, who faces divisions within his governing African National Congress party before the election, to revive Africa’s most industrialised economy.

Ramaphosa is also trying to preserve South Africa’s last investment grade credit rating, from Moody’s, which is scheduled to review its “Baa3” sovereign rating at the end of March.

“The 2019 budget shows further erosion in fiscal strength,” Moody’s said in a statement on Thursday. It added, however, that it not believe a decision to raise the expenditure ceiling would weaken fiscal policy credibility.

The other two large agencies, S&P Global and Fitch, highlighted growing government debt and sizeable contingent liabilities among causes for concern.

Analysts have said the Eskom bailout gives South Africa several years to restructure the ailing utility but still leaves it with unsustainable debts, crippling costs and stagnant sales.

“We estimate that Eskom’s balance sheet requires the support of approximately R150 billion. This amount, amortised over 10 years, amounts to about R23 billion per annum,” said Ian Stuart, a senior official at the budget office.

The rand and government bonds were stronger midway through Thursday, buoyed by optimism that a larger one-off bailout which would have seen the state taking Eskom debt onto its balance sheet was avoided.

But they both slipped later in the day as the scale of the fiscal challenge sank in.

At 1700 GMT, the rand was trading at 14.0200 per dollar, little changed on the day. The yield on the benchmark 2026 bond dipped 2 basis points to 8.82%.

BIG RISKS

Commerzbank analysts said they thought the budget had increased the risk of a Moody’s downgrade, but others said they thought South Africa might escape with a reprieve.

“The lack of success in consolidating public finances and reviving the economy has increased the risk of a rating downgrade. W, therefore,e expect at least a deterioration in the rating outlook to negative,” Commerzbank said.

Mboweni told a parliamentary committee that state firms like Eskom and a high public sector wage bill were the biggest risks to the public finances.

“We are going to be very strict with (Eskom). We want to see concrete measures in the restructuring process of Eskom,” Mboweni said.

Ramaphosa has pledged to split Eskom into three units to deal with inefficiencies, a move cautiously welcomed by investors. The utility cut off power across swathes of South Africa last week because of problems with its plants, diesel shortages and planned maintenance.

Mboweni backed up Ramaphosa in his budget statement, saying without structural change, putting public money into Eskom was like “pouring water into a sieve”.

Capital Economics chief emerging markets economist William Jackson said investors will now focus on further details of Eskom’s reform package.

“We have heard dribs and drabs of what that will be, but difficult decisions are still to be announced on payroll and jobs and won’t be popular given that the election is coming up,” Jackson said.

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