South Africa's rand, bonds tumble as Moody's and Fitch warn of Eskom risk

JOHANNESBURG: South Africa's rand tumbled to its weakest level in three weeks on Friday, while the yield on debt issued by the government and the power utility Eskom shot up as the risk grew of a credit downgrade to junk status by year-end.

At 1600 GMT, the rand was 1.24% weaker at 14.2650 per dollar, bringing its weekly losses to more than 3%. Almost half of that came after the ratings firm Moody's delivered a warning about the government's 59 billion rand ($4 billion) bailout for Eskom.

Fitch added to the negative news, trimming its outlook to negative from stable while retaining its BB+ rating, saying bailouts to state firms along with weak economic growth would push up the budget deficit and put added strain on state spending.

"The huge delay by government in announcing concrete plans about unbundling Eskom is a huge risk," said Nedbank senior economist Isaac Mashego.

Finance Minister Tito Mboweni announced plans to give Eskom the extra cash on Tuesday, but warned of lower-than-expected tax revenues and higher public debt levels as a consequence. He did not give any definite detail on the promise to break up Eskom into three individual parts.

"Moody's last credit review, and the statement this week, included Eskom's debt with the sovereign, which is something they don't usually do. And the tone was stern," Mashego said.

"If there's another delay in giving details about Eskom at the October budget, Moody's will very likely pull the trigger."

The risk premium, or yield, on Eskom bonds had fallen steadily since the end of May as the power cuts that it had been imposing earlier in the year eased, drawing mainly offshore investors looking to take advantage of returns often higher than for government paper.

On Friday, the yield on government dollar bonds rose to its highest level in more than a month, and the yield on Eskom's 2033 dollar bond rose to its highest since February.

Government bonds mirrored the upturn in risk and souring demand, with the yield on the benchmark 10-year paper climbing 18 basis points to 8.54%, its highest since June 18.

"There's been a plethora of political and economic developments that have pushed the rand weaker. And it's a clear laggard compared to its peers. Without the support of a prudent central bank, it could really have blown out," said ETM Analytics economist Kieran Siney.

The South African Reserve Bank (SARB) cut lending rates last week but cooled expectations of further reductions, and on Friday emphasised its preference for caution.

Stocks traded sideways as Eskom's woes chipped away at appetite for domestic equities.

The benchmark JSE Top-40 Index dipped 0.08% to 51,523 points while the broader All-Share Index was also down 0.08% at 57,616 points.

The banking sector, typically sensitive to the local economy and currency fluctuations, fell 1.26%, while general retailers fell 1.21%.

"Our banks and retailers are weak, as is the rand, and I think that's got to do with political constraints," said Andrew Padoa, portfolio manager at Sasfin.