The rand plummeted and bonds extended declines as investors faced the stark reality of what bailouts for the embattled state power utility will cost South Africa.
The currency retreated almost 3%, the most since September and the biggest drop in emerging markets, to R15.05/US$ as of 4.30pm. The yield on local-currency debt due in 2026 jumped 23 basis points to 8.44%.
Eskom will receive R138-billion rand in bailouts through to March 2022, or R10-billion more than previously allocated, according to the medium-term budget policy statement released by finance minister Tito Mboweni on Wednesday. He warned that extra support may be needed if plans to turn the loss-making utility around are delayed.
That means South Africa’s government debt will top 70% of GDP in the next three years and may continue rising as bailouts for state-owned companies boost spending, according to national treasury. The ratio was previously projected to rise to 60.2% in 2024, before decreasing in subsequent years.
Without plans to contain the fiscal deficit, the nation’s credit ratings may be imperiled. Moody’s Investors Service is due to review South Africa’s score this week and is the only major ratings company to still assess it at investment grade.
“This increase in debt under the weight of the Eskom bailouts, together with lingering uncertainty over Eskom debt restructuring and a weaker economic growth outlook means a revision of the rating outlook from Moody’s to negative is a strong possibility,” said Natalie Rivett, a senior emerging-markets analyst at Informa Global Markets in London.
A combination of bailouts for government firms, declining economic growth and falling tax revenue will cause the budget deficit to widen to 5.9% of GDP in the fiscal year, according to the budget statement.
“The South African rand is travelling back toward the R15 level as the medium-term budget statement compounds investors fears,” Simon Harvey, a London-based market analyst at Monex Europe. “Ballooning projected debt-to-GDP levels, increased government support for Eskom, and a widening budget deficit doesn’t bode well for an economy struggling for growth while under the microscope of both foreign investors and rating agencies.” — Reported by Dana El Baltaji and Selcuk Gokoluk, with assistance from Netty Ismail and Justin Villamil, (c) 2019 Bloomberg LP