Rating Pressure Builds on South Africa’s $28 Billion Risk

Pressure is building on South Africa to find $28 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 the nation’s ratings.

South African Airways SOC Ltd. and Eskom Holdings SOC Ltd. need about 300 billion rand of support, the bulk of which will come from the National Treasury through capital injections, interest-free loans or bond sales, the Department of Public Enterprises said on Aug. 7. 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, chief economist at Cadiz Asset Management, said by phone from Cape Town Aug. 7. “It was never the plan to fund Eskom and SAA from government coffers, but here we are. There is little room for maneuver.” Cadiz manages about $2.8 billion worth of assets, including Eskom bonds.

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.

Rating Questioned

Moody’s Investors Service said July 3 its rating on the nation may be at risk while Standard & Poor’s downgraded the nation’s debt on June 13 to BBB-, the lowest investment grade. SAA and Eskom are seeking to reduce 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 new 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 & Co. indexes.

“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 by e-mail she couldn’t comment on future rate changes. Moody’s didn’t immediately respond to an e-mail seeking comment.

Decision Pending

While Eskom and SAA struggle to raise cash, Transnet SOC Ltd., the state-owned rail and ports operator, is in the process of raising funds for a 312 billion-rand infrastructure plan without a state guarantee. The yield on Transnet’s dollar-denominated debt due July 2022 has fallen 69 basis points this year to 5.14 percent.

The rand, the worst performer over the past year against the dollar among 16 major currencies tracked by Bloomberg, weakened 0.2 percent to 10.6849 by 2:15 p.m. in Johannesburg.

While Eskom has 238.6 billion rand of debt outstanding, SAA would be a newcomer to capital markets. The carrier, which Brown said needs 50 billion rand, delayed a 1.5 billion rand sale in April 2013 pending a government turnaround plan.

“Fifty billion rand for a single entity is a big number,” Jason Lightfoot, who helps manage $13 billion including Eskom bonds at Futuregrowth Asset Management (Pty) Ltd., said by phone from Cape Town Aug. 8. “They’ll have to find alternatives to the local market like offshore funding, potential capital raisings through other instruments like convertible debt and equity.”

An SAA spokesman said he couldn’t comment on funding beyond Brown’s remarks. An Eskom spokeswoman didn’t respond to a request for comment.

“This is the tip of the iceberg for the economy,” Futuregrowth’s Lightfoot said. “There are concerns about strikes, slowing growth and all the other factors that have been creating concern about the sovereign rating. It’s going to weigh on everything else that’s already happening.”