Rand Weakens as Plan to Save Eskom May Raise Nation’s Credit Risk
Rand Weakens as Plan to Save Eskom May Raise Nation’s Credit Risk
(Bloomberg) -- South African bonds fell for a third day and the rand weakened after Finance Minister Tito Mboweni said the government may have to increase borrowing to bail out Eskom Holdings SOC Ltd. while also earmarking rescue funding for other state entities.
Yields on government notes due 2030 climbed as much as eight basis points as traders anticipated additional issuance. Investors have for months questioned how the government plans to fund the utility’s bailout, and punished local-currency bonds for the strain it will have on the nation’s finances.
“This is not good news for the long end of the sovereign-bond curve, as we have seen in the last couple of days,” said Bronwyn Blood, a fixed-interest portfolio manager at Granate Asset Management based in Cape Town. “This will most likely lead to more issuance in the long end and a steeper yield curve.”
Eskom is struggling under more than 440 billion rand ($32 billion) of debt and is seen as the biggest threat to the nation’s economy. A majority of its bonds are guaranteed by the government, which pledged another 59 billion rand spread over two years to support the company. Issuing more securities to fund the plan would weigh on the nation’s credit profile, which is already junk for its foreign-currency debt at both Fitch Ratings and S&P Global Ratings.
“Plans and conditionalities attached to whatever form of capital support is provided have to be part and parcel of whatever package is announced today,” said Jeffrey Schultz, senior economist at BNP Paribas South Africa. “If it is not, then I cannot see how rating agencies can turn a blind eye to something like this given the extent of the deterioration we’re going to see in debt and deficit metrics.”
The state-owned South African Broadcasting Corp. said it is due to get a 3.2 billion rand ($230 million) bailout after Mboweni said the government would use reserve funds to bail out the broadcaster, arms manufacturer Denel SOC Ltd. and South African Airways.
The rand weakened as much as 0.6% before paring the decline to trade 0.1% down at 13.8773 per dollar by 2:20 p.m. in Johannesburg. The yield on the 2030 bonds climbed six basis points to 8.73%, while stocks rose 0.7%.
--With assistance from Prinesha Naidoo.
To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, Hilton Shone
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