5 minutes of tension for investors

Finance Minister Enoch Godongwana’s will spend about five minutes of his budget speech Wednesday on South Africa’s main power producer Eskom, if history is anything to go by.

It’s going to be a tense 300 seconds for bondholders.

Four months after the government said it would take over as much as two thirds of Eskom’s R400 billion rand in debt, investors are still waiting to know the exact amount, the conditions and the mechanism of transfer.

“Risks are high for disappointment,” Olga Constantatos, head of credit at Cape-Town based Futuregrowth Asset Management, said in an interview. “It’s going to be very negative if the debt transfer is not mentioned at all. And potentially, it may be negative if the solution is very vague and doesn’t have the kind of clarity that’s needed.”

Should concerns persist, South Africa has mandated Citi and Nedbank to arrange a global investor call to update investors on the Eskom debt relief arrangement after the budget.

This will be followed by a series of fixed-income investor update meetings in Cape Town, Johannesburg, New York, Boston and London as part of National Treasury’s regular post-budget investor engagement.

South Africa’s local-currency bonds have dropped 5.5% in February. That’s more than double the average 2.1% decline in a Bloomberg index of emerging-market peers. The yield on 10-year notes has risen about 98 basis points in that time to 11.31%, the highest since 2 December.

Reducing Eskom’s liabilities will allow the loss-making company to raise funds to carry out plant maintenance and strengthen the power grid. There have been planned electricity cuts every day this year, and for 13 consecutive months, a record based on Bloomberg calculations.

But taking over the liabilities will add to the state’s overall debt burden of almost R5 trillion and to its debt-service costs, the fastest-growing expenditure line item for about a decade.

The yield on Eskom’s unguaranteed dollar debt maturing in 2028 is climbing for an eighth consecutive day Tuesday, the longest such streak since September. A measure of the company’s risk of default, though, has remained steady at June 2022 lows.

“I think there is a growing recognition that we can no longer tolerate delays in taking the urgent and bold steps that are needed to start to restore Eskom to standalone financial sustainability,” Constantatos said.

Read: What to expect from the budget speech this week: Eskom debt, tax hikes and more