The South African government’s decision to increase support for the embattled state power utility is wreaking havoc on the nation’s finances and may force it to increase borrowing and raise the budget deficit.
Finance Minister Tito Mboweni told lawmakers in Cape Town on Tuesday that Eskom will get R26 billion ($1.9 billion) this financial year and R33 billion in 2020-21 to help it remain solvent.
The additional bailout comes just five months after he announced a three-year R69 billion cash injection for the utility. The rand and government bonds fell. We are facing an extremely serious financial situation,” Mboweni said.
In addition to the financial support for Eskom, there are also preliminary indications that tax revenue could be ‘significantly lower’ than forecast in the 2019-20 budget.
“This could substantially increase the government’s borrowing requirement,” he said.
Rand Weakens
The rand weakened after Mboweni’s comments, declining as much as 0.6% to 13.9499 against the dollar, while yields on government bonds due 2030 climbed the most in six weeks.
“Mboweni reminded investors that South Africa faces major fiscal challenges, mainly due to the substantial burden of Eskom which needs to be properly restructured,” said Piotr Matys, a currency strategist at Rabobank in London.
Eskom has accumulated R440 billion of debt and isn’t selling enough power to cover its costs, the legacy of years of mismanagement and cost overruns at its new plants. The utility provides about 95% of the nation’s power.
While the additional government aid will enable the utility to meet its financial obligations this financial year, it remains the biggest threat to the nation’s finances and its operating model needs to be overhauled, Mboweni said.
What comes next?
The National Assembly will today consider and make decisions on the on the 2019 Appropriation Bill and the highly anticipated special Eskom Appropriation Bill.
The Appropriation Bill proposes appropriating money from the National Revenue Fund for requirements of the State and prescribes conditions for the spending of the funds withdrawn.
Finance Minister Tito Mboweni tabled the 2019/2020 national budget in Parliament on 20 February, together with the 2019 Appropriation Bill.
In a statement, Parliament said the Bill lapsed after the last sitting of the National Assembly before the May general elections.
“However, the sixth Parliament’s National Assembly revived it in June. The Minister of Finance also tabled proposed amendments on 25 June,” said Parliament.
These amendments include the authorisation of expenditure of R17.652 billion to Eskom on 2 April, in terms of section 16 (1) of the Public Finance Management Act, which deals with use of funds in emergency situations.
If today’s National Assembly plenary sitting agrees to the Appropriation Bill, the Bill will be sent to the National Council of Provinces for consideration and decision.
Earlier this month, Public Enterprises Minister Pravin Gordhan said a special bill on Eskom — aimed at finding a roadmap of the power utility’s recovery – was being drafted.
Finance Minister Tito Mboweni, Gordhan said, will soon introduce a Special Appropriation Bill aimed at bolstering Eskom’s cash position soon.
Briefing reporters in Cape Town at the time, Gordhan said work on the paper had begun.
“We should have a draft very soon for government to look at,” said Gordhan.
The power utility is currently facing financial challenges.