Eskom Power Blackout Fuels Concern Over South Africa Ratings

(Bloomberg) -- Eskom Holdings SOC Ltd., the state-owned South African utility that provides about 95% of the nation’s electricity, implemented power cuts on Wednesday amid maintenance problems. The rand weakened as investors fretted about the effect on economic growth.

Power shortages have been a major constraint on output in Africa’s most industrialized economy. Protracted outages could cost the the country its last investment-grade credit rating from Moody’s Investors Service, which is due to deliver its next assessment on Nov. 1. The government has said it will announce plans to restructure Eskom into three operating units and reorganize its debt by the end of the month.

Read more: why Eskom’s power crisis is South Africa’s top risk

“The timing isn’t great,” said Simon Harvey, a London-based currency analyst at Monex Europe Ltd. “Whether this is a short-term reaction from Eskom to stem longer-term supply issues or is the start of a continuous process is key and will determine if the rand’s sell-off is more structural. Regardless, investors won’t take the news well.”

The power cuts were likely to last from 9 a.m. to 11 p.m. local time, Eskom said in a Twitter posting, without specifying whether this was a one-off or the start of a new round of rolling blackouts. The utility, which has amassed 450 billion rand ($30 billion) of debt and is reliant on state bailouts to remain solvent, has battled to meet demand for electricity because most of its plants are old and have been poorly maintained.

‘Extremely Constrained’

“The electricity system has been extremely constrained this week,” due to unplanned plant breakdowns, Eskom said. “We unreservedly apologize to South Africans for the negative impact this may have on them and want to ensure the nation that we continue to work tirelessly to ensure security of energy supply.”

The rand slumped as much as 1.1% before paring the decline to trade 0.8% weaker at 15.0035 per dollar by 4:10 p.m. in Johannesburg. Yields on benchmark 2026 government bonds climbed five basis points to 8.29%.South Africa has experienced intermittent power cuts since late 2005, with the previous round occurring more than six months ago.

Business Unity South Africa, a lobby group, urged the government to finalize an energy plan as a basis to stabilizing power supplies. A review of Eskom’s capital structure, operating model and tariff regime is also “of the utmost importance” to esnure the company can meet energy supplies, it said in a statement.

Read a related article about the impact of the outages on Zimbabwe

Eskom attributed the latest outages -- it had to cut 2,000 megawatts from the national grid -- to boiler tube leaks at five of its generating units and the breakdown of a conveyor belt used to supply coal to its Medupi plant. Pumped storage and open cycle gas turbine facilities had been used extensively due to shortages of generation capacity from its coal-fired plants, lowering dam levels and diesel supplies, it said.

“The announced blackouts should be a very strong incentive for the administration to urgently address prevailing issues at Eskom,” said Piotr Matys, a currency strategist at Rabobank in London. “It is absolutely critical that a comprehensive and credible restructuring plan is quickly implemented, not only to avoid more blackouts in the future that seriously undermine economic activity, but also to reduce the risk of South Africa being downgraded to junk by Moody’s.”

--With assistance from Robert Brand.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net;Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Paul Richardson at pmrichardson@bloomberg.net, Robert Brand, Liezel Hill

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