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South Africa's rand, bonds tumble as Moody's Eskom warning sours sentiment

Credit: REUTERS/THOMAS WHITE

South Africa's rand tumbled to its weakest in three weeks on Friday, while the cost of government and power utility Eskom's debt shot up as the risk grew of a credit downgrade to junk by year-end.

Adds details, analyst comments, Eskom bonds

JOHANNESBURG, July 26 (Reuters) - South Africa's rand tumbled to its weakest in three weeks on Friday, while the cost of government and power utility Eskom's debt shot up as the risk grew of a credit downgrade to junk by year-end.

At 1430 GMT the rand was 1.21% weaker at 14.2575 per dollar, bringing weekly losses to more than 3%, with close to half of that coming after ratings firm Moody's delivered a warning about the government's 59 billion rand ($4 billion) bailout to Eskom.

"The huge delay by government in announcing concrete plans about unbundling Eskom is a huge risk," said Nedbank senior economist Isaac Mashego.

Finance Minister Tito Mboweni announced plans to give Eskom the extra cash on Tuesday, but warned of lower-than-expected tax revenues and higher public debt levels as a consequence. He did not give any definite detail on the promise to break up Eskom into three individual parts.

"Moody's last credit review, and the statement this week, included Eskom's debt with the sovereign, which is something they don't usually do. And the tone was stern," Mashego said.

"If there's another delay in giving details about Eskom at the October budget, Moody's will very likely pull the trigger."

The risk premium, or yield, on Eskom bonds had fallen steadily since the end of May as power cuts it implemented earlier in the year eased, drawing mainly offshore investors looking to take advantage of returns often higher than government paper.

But since the Moody's statement on Thursday, yields on Eskom debt have jumped back up. On Friday, the yield on Eskom's 2033 bond ZAE33= jumped 10.5 basis points to 10.715%, having traded at its lowest in over 12 months before the warning.]

Government bonds mirrored the upturn in risk and souring demand, with the yield on the benchmark 10-year paper ZAR186= climbing 16 basis points on the day to 8.34%, its highest since June 18.

"There's been a plethora of political and economic developments that have pushed the rand weaker. And it's a clear laggard compared to its peers. Without the support of a prudent central bank it could really have blown out," said ETM Analytics economist Kieran Siney.

The South African Reserve Bank (SARB) cut lending rates last week but cooled expectations of further reductions, and on Friday emphasised its preference for caution.

Governor Lesetja Kganyago said "a stable and predictable path of interest rates will enhance the environment for sustained economic growth".

($1 = 14.2559 rand)

(Reporting by Mfuneko Toyana; Editing by Andrew Cawthorne)

((macdonald.dzirutwe@thomsonreuters.com; +27 11 595 2850; Reuters Messaging: macdonald.dzirutwe.thomsonreuters.com@reuters.net))

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