South Africa will bail out state utility Eskom with 69 billion rand ($4.9 billion) over three years, according to a budget on Wednesday that exposed the limited room President Cyril Ramaphosa has to fix the economy ahead of an election in May.
Ramaphosa, who is fighting rifts within his own party ahead of the parliamentary vote, has made reforming Eskom one of his highest priorities as the utility`s 420 billion rand debt pile poses a direct threat to Africa`s most developed economy.
In an effort to make Eskom more efficient, Ramaphosa said this month the utility would be split into three separate entities -- generation, transmission and distribution.
But any reforms would include major job cuts, an option that was unlikely to be implemented before the election amid fierce opposition from leftist sections of the ruling African National Congress (ANC) and powerful trade unions.
The ANC is expected to win the election but only a handsome victory would give Ramaphosa the mandate to push through painful reforms that are opposed by those within the ruling party still loyal to his scandal-plagued predecessor Jacob Zuma.
In his maiden budget speech, Finance Minister Tito Mboweni announced to parliament more emergency funds for Eskom but rejected Eskom`s request that the state take on 100 billion rand of the utility`s debt.
"Pouring money directly into Eskom in its current form is like pouring water into a sieve," Mboweni said.
"I want to make it clear: the national government is not taking on Eskom`s debt."
The rand recovered after initially dropping in response to a budget statement that also forecast wider deficits, rising debt and slower economic growth.RATINGS AGENCIES
Increasing debt to fund Eskom in a low economic growth environment will be a concern for ratings agencies. Moody`s, the last to have South Africa at investment grade, is due to announce its latest ratings decision at the end of next month.
"The deficit projections are quite disappointing, the government is still not able to consolidate the fiscus," said Jana van Deventer, an economist at ETM Analytics.
"The really difficult decisions which need to be taken are not being made. There is a risk that ratings agencies will say time is up.”
Eskom was given a 60 billion rand loan in 2008 which was later converted into equity. In 2015 the government sold state assets to give Eskom an additional 23 billion rand bailout.
Further financial support would depend on economic growth, electricity tariffs and the implementation of the company`s strategy, Treasury said in a budget statement.
Eskom last week subjected South Africa to the worst power cuts in several years due to plant-related problems, diesel shortages and planned maintenance.
The outages exposed the risks to the economy from Eskom`s virtual monopoly and the failure of successive governments to take on labour unions and factions in the ANC who consider any form of privatisation as a red line.
The first step in splitting Eskom would be to transfer a portion of the utility`s assets to a new transmission subsidiary that will invite the participation of strategic equity partners to provide capital and strengthen oversight, the Treasury said.
"We have had very very difficult conversations with the ratings agencies," Mboweni told journalists.
"If we are doing practical things to fix Eskom the electricity sector, in my view, that should be viewed as positive."
($1 = 14.1498 rand)
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)
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