South African Road Tolls Delay May Add to Government Debt

South African sovereign bond yields may increase after a High Court prevented the state road agency from implementing tolls in Johannesburg from today, adding to the government’s debt burden, Rand Merchant Bank said.

The likelihood the government will have to repay outstanding debt of 20 billion rand ($2.6 billion) owed by the South African National Road Agency Ltd. has increased, Carmen Nel, an economist at Johannesburg-based RMB, said in an e-mailed note to clients today.

The Pretoria High Court on April 28 prevented Sanral from starting electronic tolling on 185 kilometers (115 miles) of roads around Johannesburg after consumer and labor groups pushed for a delay. That decision came two days after the ruling African National Congress and the country’s largest labor federation agreed at a meeting to postpone the toll system for a month.

“The bond market will probably start to price a higher risk premium to compensate for the uncertainty,” Nel said in the note. “If users will not be paying for infrastructure development, there must be a significant risk that funding will be raised in bond markets.”

The yield on the government’s R157 bond, due 2015, fell one basis point, or 0.01 percentage point, to 6.47 percent today.

Budget Deficit

Sanral wants to charge road users between 30 cents and 1.75 rand a kilometer to help repay debt incurred in expanding highways. The government has already allocated 5.75 billion rand to Sanral.

South Africa is struggling to narrow its budget deficit to 4.6 percent of gross domestic product this year as a slowdown in the global recovery curbs growth in Africa’s largest economy. The government is spending as much as 300 billion rand on roads, railways and power plants to bolster the economy and create jobs for one in four people that’s unemployed.

“The whole process must be viewed as a setback for the country as it questions the viability of the government’s infrastructure program and is potentially negative for government’s funding costs,” Nel said.

Jabulani Sikhakhane, spokesman for the National Treasury in Pretoria, declined to comment when called on his mobile phone today. Tiyani Rikhotso, spokesman for the Department of Transport, wasn’t immediately available when called on his mobile phone.

Public Investment Corp.

The postponement of the toll system raises the risk that Sanral’s debt rating may be downgraded, Nel said. Moody’s Investors Service on Feb. 29 lowered the rating to Baa1 from A3 and changed the outlook to negative, indicating it may be cut again.

The state-owned Public Investment Corp., South Africa’s largest fund manager, which holds 17.7 billion rand of Sanral’s outstanding debt, said it’s not concerned about a default. The PIC owns 56 percent of Sanral’s debt, according to Bloomberg calculations.

“PIC communicates with all the companies in which it is invested, and that includes Sanral,” Chief Executive Officer Elias Masilela said in an e-mailed response to questions today. “We are not at all concerned about a default. But having said this, we do not want to be drawn into a speculative exercise.”

The yield on Sanral’s rand-denominated debt due in 2028 rose eight basis points, or 0.08 percentage point, to 9.25 percent last week.

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