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Rand wobbles following Moody’s warning over Eskom bailout

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Rand takes a plunge following proposal to further bail out Eskom. Picture: Supplied
Rand takes a plunge following proposal to further bail out Eskom. Picture: Supplied

The rand weakened on Thursday, dragged lower by a Moody’s report saying the government’s proposal to offer R59 billion in additional support for cash-strapped power utility Eskom was credit negative.

At about 9am on Thursday rand was 0.4% weaker at 13.94 to the dollar, having opened the session on 13.90.

Eskom, which supplies more than 90% of South Africa’s power but had to implement power cuts earlier this year, is grappling with high debt and has needed cash injections to stay afloat.

Finance Minister Tito Mboweni presented an appropriation bill to Parliament on Tuesday to give Eskom the extra cash, but warned at the same time of lower-than-expected tax revenues and higher public debt levels.

In a worst-case scenario, Moody’s said it expected South Africa’s fiscal deficit could widen to 5.7% of gross domestic product in 2019, up from current projections of 5.2%.

Bonds also slipped, with the yield on the benchmark 10-year government issue up 4 basis points to 8.13%.

Earlier this week, Mboweni conceded that the additional R59 billion required by Eskom to stay afloat would come at “a significant cost” to South African taxpayers.

He also revealed that this year’s tax revenues could be significantly lower than anticipated resulting in the country needing to borrow more.

Read: R59bn Eskom bailout will come at 'significant cost' to taxpayers - Mboweni 

Mboweni, on Tuesday morning in Parliament, introduced the special appropriation bill, saying that an additional R26 billion would be needed for the 2019/2020 financial year while an extra R33 billion would be needed for the following year.

“Honourable members should also be reminded that the fiscal support we are announcing today will come at a significant cost to the fiscus and to the South African taxpayers. In addition to the financial support to Eskom, there is also a preliminary indication that tax revenue could be significantly lower than budgeted for in the 2019 budget. This could substantially increase the government borrowing requirement for 2019/2020, which will require government to revise its funding strategy and current weekly bond issuance levels before the medium term budget statement in October,” Mboweni told the National Assembly.

He said that Eskom’s survival was dependant on restructuring and that he had been in talks with Minister of Public Enterprises Pravin Gordhan on what the best option might be.

Mboweni reiterated that Eskom was at a high risk of a systemic failure and said that the operational and financial challenges faced by the state-owned enterprise were caused by “the governance challenges that the entity previously experienced which resulted in a decline in investor confidence”.

Government had initially committed R23 billion to be allocated to Eskom over the next three years, but Mboweni said the additional cash injection was necessary in order for the power utility to meet its financial obligations.

“I wish to repeat what I said in my budget vote speech: We really and truly cannot go on like this. Therefore, it is important that government urgently implements the restructuring of Eskom into three entities – generation, transmission and distribution.”

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