Moody’s says new financial support for Eskom is credit negative
Moody’s says the government will struggle to absorb the costs of R59bn in extra support for Eskom over the next two years, while no clear turnaround plan has emerged
Ratings agency Moody's Investors Service said on Thursday that the SA government will struggle to absorb the costs of R59bn in support for Eskom over the next two years. The ratings agency says recently announced funding for the embattled power utility is “credit negative”.
The government will struggle to absorb the costs of support for Eskom and other state-owned enterprises, Moody's said in a statement, adding that because no clear turnaround strategy for Eskom had been forthcoming, there was risk of it needing even more financial support.
“Additional support to Eskom in the special appropriation bill will adversely pressure the government’s fiscal position, given its limited room to absorb the extra cost,” the agency said in a statement on Thursday.
Finance minister Tito Mboweni unveiled plans for an additional R59bn in support for Eskom over the next two years on Tuesday, with Mboweni saying then that given the possibility of lower tax revenue due to tepid economic growth, the SA government may need to substantially increase its borrowing requirement for the 2019/2020 financial year.
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Mboweni acknowledged this was a “very serious financial situation”.
The rand initially weakened as much 0.68% to R13.9785/$ after the news on Thursday, but recovered some of its losses, and at 12.15pm was 0.46% softer at R13.9472/$.
The bid on the benchmark R186 government bond was unmoved by the announcement, having weakened from Wednesday's close. It had fallen 2.5 basis points to 8.105%.
Focus on Thursday was squarely on global monetary policy announcements, including the European Central Bank interest rate announcement later, and the US Federal Reserve monetary policy announcement next week.
These factors were helping to keep the rand below the psychologically important R14/$ level, said IG market analyst Shaun Murison.
“The domestic factors such as Eskom and Moody’s,, while not having been prevalent in guiding the rand this week, remain genuine concerns and are likely to impact our local currency in the not-too-distant future,” Murison said.
Moody’s is currently the only major ratings agency that rates SA's credit as investment grade. Should it downgrade SA to junk status, SA will fall out of global bond indices, which are tracked by global investment funds, and which would prompt automatic selling of local debt.
Moody's said on Thursday that as the government had already embedded several cost-containment measures in the budget, further restraint would be difficult.
“The lack of a strategy to return Eskom to more stable financial situation that would reduce the need for government support exacerbates the problem for the government,” the statement by Moody's sovereign credit analyst for SA, Lucie Villa, read.
The prospect of SA's widening deficit and a downgrade by Moody's continues to weigh on SA bonds and the rand, with analysts noting that longer-dated government debt seems particularly affected.
The prospect of loose monetary policy is providing support for local bonds currently, although concerns over Eskom are being reflected in longer-dated debt, said Jeffrey Schultz, senior economist at BNP Paribas SA.
Moody's ultimately would need to react to Mboweni's announcement on Tuesday, which only provided a solution to Eskom's short-term liquidity needs but not the company's major long-term funding issues, Schultz said.
Moody's is likely to change SA's credit-outlook to negative in November, but is unlikely to downgrade SA to junk status in 2019, he said.