The South African government’s decision to increase support for the embattled state power utility is wreaking havoc on the nation’s finances and may force it to increase borrowing and raise the budget deficit.
Finance Minister Tito Mboweni told lawmakers in Cape Town on Tuesday that Eskom Holdings SOC Ltd. will get 26 billion rand ($1.9 billion) this financial year and 33 billion in 2020-21 to help it remain solvent. The additional bailout comes just five months after he announced a three-year 69 billion-rand cash injection for the utility. The rand and government bonds fell.
“We are facing an extremely serious financial situation,” Mboweni said.
In addition to the financial support for Eskom, there are also preliminary indications that tax revenue could be “significantly lower” than forecast in the 2019-20 budget. “This could substantially increase the government’s borrowing requirement,” he said.
The rand weakened after Mboweni’s comments, declining as much as 0.6% to 13.9499 against the dollar, while yields on government bonds due 2030 climbed the most in six weeks.
“Mboweni reminded investors that South Africa faces major fiscal challenges, mainly due to the substantial burden of Eskom which needs to be properly restructured,” said Piotr Matys, a currency strategist at Rabobank in London.
Eskom has accumulated 440 billion rand of debt and isn’t selling enough power to cover its costs, the legacy of years of mismanagement and cost overruns at its new plants. The utility provides about 95% of the nation’s power.
While the additional government aid will enable the utility to meet its financial obligations this financial year, it remains the biggest threat to the nation’s finances and its operating model needs to be overhauled, Mboweni said.