JOHANNESBURG – The rand extended its losses against the dollar yesterday after the Department of Public Enterprises (DPE) warned that Eskom was near collapse, paving the way for the struggling utility to receive more billions in cash injections from the state.
The rand surrendered overnight gains made on progress in US-China trade talks that boosted risk assets as the department said that Eskom only had money to last it until next month.
The local currency weakened to R13.88 from R13.72 a dollar and bonds withered after the department laid bare Eskom’s operational and financial troubles, prompting President Cyril Ramaphosa to move to assure the markets that the government was in control and that he would reveal further plans to aid the ailing utility.
“We have been discussing all morning as Cabinet the dire situation we are in and we working out a number of plans so we can address this challenge collectively,” Ramaphosa said.
“We are going to be coming up with some announcements tomorrow and the following week we will also address the financial aspect.”
By 7pm, the rand had slipped to R13.97 a dollar while yields on the benchmark government 10-year bonds rose five basis points to 8.84 percent, the highest in three weeks.
Acting DPE director-general Thuto Shomang told legislators that the utility’s R420 billion debts amounted to 15 percent of the country’ sovereign debt and that should it default, the economy would be battered.
Eskom’s debt pile climbed to 8.5 percent of gross domestic product (GDP) last year.
Last week, the power utility said that the government should assume part of its debt to allow it space to rebuild from a clean slate.
The remark came hours before Eskom implemented massive power cuts across the country that have left the economy teetering on the brink of disaster this week.
Shomang said that the utility’s headcount, which has surged from 32 000 workers in 2007 to 48 000 last year at a cost of R29.5bn, was unsustainable.
He said that debt owed to it by municipalities was growing at R1bn a month.
“Our cash generation does not cover operating and debt servicing costs,” Shomang explained.
The department also flagged the giant power producer’s cost overruns and poor performance from its build programme as a big risk.
It added that the costs for the plants had escalated significantly to more than R300bn with Medupi costs surging from R24.9bn to R145bn and Kusile from R80.7bn to R161.4bn.
Capital Economics economist John Ashbourne said the biggest risk was that the government would prolong the crisis by bailing out Eskom instead of overhauling the utility.
“The government will announce some kind of rescue at next week’s budget.
"Whether it is higher tariffs, big government investments, or (most controversially) some kind of privatisation, it’s clear that something has to give,” Ashbourne said.
“Half-hearted measures – providing funding but no structural reforms – will only prolong the pain.
"The key point here is that Eskom needs a big infusion of cash to meet its debt commitments and make the investments needed to keep the lights on,” Ashbourne emphasised.
Eskom said that it expected to post a R20.1bn loss for the financial year to March from the R15bn that the embattled power utility forecast at its mid-year results.
Last week, Ramaphosa said that the government would support Eskom’s balance sheet while separating it into generation, transmission and distribution units.
He said Finance Minister Tito Mboweni would provide further details in his Budget speech on Wednesday.
Nolan Wapenaar, of Anchor Capital, said that a bailout of Eskom without fixing the underlying root causes just perpetuates the bailout machine.
“We argue that the solution lies in something that is not being mentioned or discussed because it is politically very uncomfortable.
"A controlled default of Eskom on its debts is, in our view, the most appropriate tool for restructuring or addressing all three obvious problems – the balance sheet, Eskom’s operations and the legislative environment in the country,” Wapenaar said.
“We are advocating that Eskom undergoes a negotiated business rescue.”