The rand weakened on Thursday as Moody\u2019s Investors Service, the only major rating company that still assesses South Africa at investment grade, warned a decision to more than double state financial support for Eskom Holdings SOC Ltd. is \u201ccredit negative.\u201d<\/p>\n
While the government may try to absorb some of the costs of the bailout for the cash-strapped power utility in the mid-term budget in October, the ‘room to manoeuvre is extremely constrained’, Moody\u2019s said in a report on its website.<\/p>\n
The rand was the worst-performing emerging-market currency against the dollar and government bond yields climbed as the comments stoked speculation the investment-grade status may be at risk.<\/p>\n
“The additional support to ease the company\u2019s financial pressures would be credit negative for South Africa because it would be an additional drain on fiscal resources,” Moody\u2019s said.<\/p>\n
“The lack of a strategy to return Eskom to a more stable financial situation that would reduce the need for government support exacerbates the problem for the government.”<\/p>\n
Finance minister Tito Mboweni this week announced a second multi-billion dollar package for Eskom within five months, aid that may force the Treasury to increase borrowing and taxes.<\/p>\n
The R59 billion ($4.2-billion) cash injection over the next two years adds to the three-year, R69 billion bailout unveiled in the budget in February.<\/p>\n
No Clear Strategy<\/strong><\/p>\n “No clear strategic turnaround plan agreeable to all stakeholders has emerged yet, fueling risks for the government of having to provide additional support,\u201d Moody\u2019s said.<\/p>\n Morgan Stanley analyst Andrea Masia estimates the budget gap could widen to about 6.4% of gross domestic product in the current fiscal year, taking into account the rescue package and weaker-than-expected tax revenue. The Treasury forecast a 4.5% shortfall in the February budget.<\/p>\n \u201cA significant deterioration in debt and deficits will not be ignored by Moody\u2019s,\u201d said Natalie Rivett, senior emerging-markets analyst at Informa Global Markets in London. \u201cThis all reinforces our view of downside risks to the rand into year-end.\u201d<\/p>\n The rand erased earlier gains after the report, sliding as much as 1.4% against the dollar.<\/p>\n It traded 1.1% weaker at 14.0317 per dollar by 16:39\u00a0 in Johannesburg. yields on rand-denominated government bonds due December 2026 climbed eight basis points to 8.17%.<\/p>\n Eskom is planning a non-deal roadshow a week after the release of its annual results, Ksenia Mishankina, a senior credit research analyst at Union Bancaire Privee, said in a note to clients.<\/p>\n The company said earlier this month that it planned to report full-year numbers at the end of July.<\/p>\n
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