The rand plummeted and bonds extended declines after investors were presented with the stark reality of what bailouts for the embattled state power utility will cost South Africa.
The currency retreated 2%, the most since August and the biggest drop in emerging markets, to R14.924 per dollar, as of 2:51 p.m. in Johannesburg. The yield on local-currency debt due 2026 jumped 18 basis points to 8.38%.
Eskom Holdings SOC Ltd will receive R138 billion ($9.4 billion) in bailouts through 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 gross domestic product in the next three years and may continue rising after that as bailouts for state-owned companies boost spending, according to the National Treasury. The ratio was previously projected to rise to 60.2% in 2024, before decreasing in subsequent years.
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 gross domestic product in the fiscal year.
“The South African rand is traveling back towards the 15 level as the medium-term budget statement compounds investors fears,” Simon Harvey, a London-based market analyst at Monex Europe Ltd.
“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.”