Eskom, SAA funding gaps pressure SA

Eskom is struggling to raise cash and seeks to cut its costs. Photo: Simphiwe Mbokazi

Eskom is struggling to raise cash and seeks to cut its costs. Photo: Simphiwe Mbokazi

Published Aug 12, 2014

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Pressure is building on the government to find R300 billion to plug funding gaps in the state-owned airline and power utility, threatening efforts to cut the budget deficit as it risks weighing on South Africa’s credit ratings.

SAA and Eskom needed about R300bn of support, the bulk of which would come from the National Treasury through capital injections, interest-free loans or bond sales, the Department of Public Enterprises said last week.

Such sums are challenging Finance Minister Nhlanhla Nene, who is struggling to boost tax revenue from an economy facing a recession as he seeks to keep the budget deficit at 4 percent of gross domestic product this year.

“If the government uses its balance sheet to bail out these entities and provide funding, it puts its own rating in question,” Adenaan Hardien, the chief economist at Cadiz Asset Management, said on Thursday. “It was never the plan to fund Eskom and SAA from government coffers, but here we are. There is little room for manoeuvre.”

The additional cash call is threatening South Africa’s ratings after a strike by platinum miners that caused the economy to shrink 0.6 percent in the first quarter was followed by a four-week walkout by 220 000 metalworkers.

Moody’s Investors Service said on July 3 that its rating on the nation might be at risk while Standard & Poor’s (S&P) downgraded South Africa’s debt on June 13 to BBB-, the lowest investment grade.

SAA and Eskom are seeking to cut costs and replace aging equipment.

The yield on Eskom’s August 2023 bond has climbed 53 basis points to 6.11 percent since July 28, the day before Public Enterprises Minister Lynne Brown said she and the Treasury were in “serious discussion” over the company’s funding plans. Yields on emerging market utilities’ dollar debt have risen 17 basis points in the period, according to JPMorgan Chase indices.

“The main thing is to prevent a downgrade on Eskom from the credit agencies and the country as a whole from getting downgraded,” Brown said. “The pressure is on. If the credit agencies downgrade, it’s bad for the whole country.”

A spokeswoman for S&P said she could not comment on future rate changes. Moody’s did not immediately respond to an e-mail seeking comment.

While Eskom and SAA struggle to raise cash, Transnet is in the process of raising funds for a R312bn infrastructure upgrade without a state guarantee. The yield on Transnet’s dollar-denominated debt due in July 2022 has fallen 69 basis points this year to 5.14 percent.

While Eskom has R238.6bn of debt in issue, SAA would be a newcomer to capital markets. The carrier, which Brown said needed R50bn, delayed a R1.5bn sale in April last year pending a government turnaround plan.

Jason Lightfoot, a fund manager at at Futuregrowth Asset Management, said R50bn “for a single entity is a big number. They’ll have to find alternatives to the local market like offshore funding, potential capital raisings through other instruments.”

An SAA spokesman said he could not comment on funding. An Eskom spokeswoman did not respond to a request for comment. – Bloomberg

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