Shock turns to hope as traders bet SA can dodge downgrade

2019-02-20 16:50 - Dana El Baltaji and Colleen Goko, Bloomberg
(Picture: Supplied) ~ Photo Supplied

Just minutes into his maiden budget speech, Finance Minister Tito Mboweni looked to have sparked a market rout.

The eye-popping prediction that the proportion of government’s debt to gross domestic product would top 60% by 2024 sent the rand down as much as 2.3%, wiping out this year’s gains. The yield on the nation’s debt due 2026 briefly pierced past 9%.

But a rescue plan for foundering power utility Eskom calmed traders’ nerves as it appeared to avert a South African credit rating downgrade from Moody’s Investors Service, at least for now.

The beleaguered power utility that supplies 95% of the country’s power will receive a R69bn cash injection over the next three years to help service its debt. Part of the utility’s transmission business will also be sold to private investors.

The rand was trading 0.2% higher as of 15:58 in Johannesburg, and the yield on government debt due 2026 declined three basis points to 8.85%.

"The government isn’t shying away from confrontation with the unions and is seeking equity partners for the transmission unit," said Henrik Gullberg, a Nomura International strategist in London. "This is the best that realistically could have been hoped for."

Moody’s is scheduled to assess South Africa’s debt on March 29. A cut to South Africa’s credit rating would see government bonds ejected from the World Government Bond Index with outflows from the bond market of between $8bn and $10bn, according to Investec.