During the presentation of the South African budget, Finance Minister Enoch Godongwana revealed plans to tackle the debt issues at the struggling state-run power utility. This announcement caused a short-lived rally in the value of the rand, especially after a not-so-favorable past of the South African Economy. The good news relieved investors at last.
The South African currency strengthened by 0.7% against the US dollar. However, the value remained largely unchanged after the Finance Minister concluded his speech. South Africa’s yield on the most liquid debt dropped, suggesting that investors think Eskom Holdings SOC Ltd’s debt transfer plan is good. This optimism insinuates that the plan will not significantly impact the overall debt metrics of the government.
Only a few hours before Godongwana gave his speech, South Africa suffered a historic level of power outages. He addressed Cape Town lawmakers and disclosed plans to contribute 254B rands ($13.9B) worth of aid to the distressed power company. The assistance program calls for Eskom to partially privatize South Africa’s coal-fired plants and electricity transmission network in addition to implementing measures to enhance its performance.
Government to Provide Eskom with 184B Rand in Funding, with Possibility of Equity Conversion
The government will give Eskom Holdings SOC Ltd 184B rands each year until March 2026. The funds should repay maturing debt and interest expenses. If Eskom meets its performance requirements, the government will change funding to equity. According to the National Treasury, a large chunk of transfers will be financed through additional debts.
In the fiscal year of 2026, the state will also take charge of up to 70B rands of Eskom’s loan portfolio. This will be realized by transforming responsibilities into state debt. The issuance of short and long-term loans will fund it, respectively.
The yield on Eskom’s unsecured portion of dollar notes maturing in 2028 decreased 52 basis points to 9.42%. By 3:26pm local time, the currency was 0.1% higher.
The announcement of tax incentives for companies that invest in renewable energy by Godongwana resulted in a positive market response. Particularly, South African food manufacturers were content. Prior to the budget speech, a Johannesburg index for food manufacturers had fallen by 1.2%. However, it quickly rebounded because of the hopeful announcement.