Rand gains on hopes South African budget will prevent downgrade

CAPE TOWN: South Africa's rand rebounded on Thursday as traders bet that a budget released the day before would persuade ratings agency Moody's not to downgrade the country's debt to "junk" status next month.

President Cyril Ramaphosa, who faces divisions within his ruling African National Congress before parliamentary elections in May, has staked his reputation on reviving South Africa's economy.

Finance Minister Tito Mboweni on Wednesday painted a bleaker outlook for growth and debt in a budget that gave a 69 billion rand ($5 billion) bailout over three years to Eskom, the struggling state power utility.

Analysts have said the bailout gives Eskom several years to implement a restructuring plan but still leaves it facing an uncertain future with unsustainable debts, crippling costs and stagnant sales.

A senior Treasury official said on Thursday that the government had included in its national debt-to-GDP projections a further 23 billion rand of annual support to Eskom after the three-year period outlined in the budget.

"We estimate that Eskom's balance sheet requires support of approximately 150 billion rand. This amount, amortised over 10 years, amounts to about 23 billion rand per annum," Ian Stuart, a senior official at the budget office, told Reuters.

The rand initially weakened, falling to a seven-week low of 14.3700 to the dollar. It recovered after markets digested Mboweni's pledge of modest cuts to public spending and more widespread reforms to state companies, including Eskom.

By 1145 GMT on Thursday, it was trading at 13.8725 per dollar, 1 percent stronger than its overnight close.

Government bonds also gained, with the yield on benchmark paper due in 2026 dipping 5 basis points to 8.79 percent.

ESKOM REFORM

On Thursday, Mboweni told a parliamentary committee that ailing state-owned companies such as Eskom and a high public sector wage bill were the biggest risk to the public finances.

"We are going to be very strict with (Eskom). We want to see concrete measures in the restructuring process of Eskom," Mboweni told the committee.

Moody's, the last of the major credit agencies not to rate South Africa as "junk", said the budget showed South Africa's limited options in a challenging economy, reflecting sympathy for a situation Mboweni inherited when he took over the Treasury in October. Moody's will review its rating next month.

"The Finance Minister explained that the (Eskom) financial aid was subject to conditions and outlined the first steps towards restructuring the electricity utility," Commerzbank analysts said in a note. "This seems to have alleviated ... concerns about a rating downgrade at the end of March."

Ramaphosa has pledged to split Eskom into three units to deal with inefficiencies, a move cautiously welcomed by investors. The utility cut off power across swathes of South Africa last week because of problems with its plants, diesel shortages and planned maintenance.

Mboweni backed up Ramaphosa in his budget statement, saying without structural change, putting public money into Eskom was like "pouring water into a sieve".

Capital Economics chief emerging markets economist William Jackson said investors will now focus on further details of Eskom's reform package.

"We have heard dribs and drabs of what that will be but difficult decisions are still to be announced on payroll and jobs and won't be popular given that the elections are coming up," Jackson said.