Investment bank Goldman Sachs said South Africa’s rand could tumble 3.5% if state-run power utility Eskom suffers a major sell-off in its bonds – but it could also jump 4.5% if the firm’s troubles improve.
Reuters reports that Goldman’s ‘Eskom risk gauge’ is now close to its most elevated reading since it was started in 2013 – suggesting that markets were currently pricing ‘close to peak Eskom risk’.
“In a negative (scenario) where Eskom risk rises further, the rand could weaken by 3.5% and (South African government debt) yields could widen by 45 basis points,” Goldman’s analysts said.
They added that even more outsized reactions were also possible in the event of a major sell-off.
In contrast, in a positive scenario where Eskom stress dropped back to 2014 levels, modelling pointed to a 4.5% stronger rand and a 55 basis point improvement in 10-year government yields, the analysts said.
“With more acute financial and operational issues at the company and the task force report due at the end of the month, we think that policy decisions relating to Eskom could be more forthcoming now than they have been at times in the past.
“Nonetheless, given the current political constraints related to upcoming general elections (likely to take place in May 2019), any deeper-cutting and more comprehensive policies may only be possible post-election,” Goldman said.
Goldman’s forecast comes as Eskom pleaded with the public and the regulator for another tariff hike which could see South Africa’s electricity tariffs by 15% per annum over the next three years (a total 52% hike over the period).
On Monday (14 January), the National Energy Regulator (Nersa) started public hearings on Eskom’s fourth multi-year price determination (MYPD4) of electricity tariffs, for the three years from April 2019 to March 2022.
However, CEO Phakamani Hadebe has acknowledged that higher tariffs will not solve the power utilities’ debt problems entirely.
Fin24 reports that both Hadebe and Eskom Chief Financial Officer Calib Cassim had stressed the power utility’s debt situation – growing from R380 billion to R419 billion over the past year.
Hadebe added that Eskom was still in a position in which it is using more debt to pay off debt.
“In a personal capacity that’s like using one credit card to pay for another credit card,” he said. “At the end of the day we want a situation where can meet debt service commitments.”