Home / It’s the economy, stupid! Eskom, the Rand and Ramaphosa’s State of the Nation Address

It’s the economy, stupid! Eskom, the Rand and Ramaphosa’s State of the Nation Address

FX Scouts By Jeffrey Cammack Updated: September 26, 2019
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After a modest rally over the last few weeks, the Rand was weaker against major currencies again on Friday morning. This follows a subdued reaction to President Cyril Ramaphosa’s state of the nation address (SONA) on Thursday evening.

Ramaphosa’s SONA was largely viewed as a safe, political speech, and contained little detail on what the government intends to do to save Eskom. The struggling utility is still unable to meet the electricity needs of the country and is being weighed down by a mountain of debt – which is now threatening the economic stability of the country.

In February, Ramaphosa had announced plans to split the struggling utility into three companies: generation, transmission and distribution – but it seems that this plan has fallen foul of powerful unions and political resistance. Instead, last night the President said that Parliament will table a special appropriations bill to grant a “significant portion” of the R230bn in support that Eskom requires. He did not say what proportion of the R230bn would be allocated.  According to recent calculations by Bloomberg, Eskom’s debt is approaching R500bn.

How exactly the President intends to bail out Eskom remains unclear. In an investors conference earlier this year, the President stated that ”Eskom is too big to fail, if Eskom fails, this economy fails.” But, with the economy in recession (largely a result of the rolling blackouts imposed on the country due to Eskom’s crumbling infrastructure) and no room to increase the tax burden on the populace, the choices facing the government are stark. The budget deficit is due to pass 5% this year and more borrowing will only add further economic pressure.

Unfortunately, there was little detail on what would be done to support economic growth. “While the tone of the address was upbeat and positive, the country remains in the dark as to what exactly the turnaround plan for the economy will entail,” said Bianca Botes, Peregrine Treasury Solutions corporate treasury manager, in a note to clients.

The Rand, along with other emerging-market currencies, has rallied this week as a result of dovish signals from the US Federal Reserve, with markets now assuming there will be a 25 basis point cut before the end of July.

But the outlook for the Rand and the South African economy, in general, is dire. With his hands tied by the unions and his own party and facing economic disaster, the President’s only option is to increase the debt burden on the nation. This will inevitably lead to a weaker Rand, only further increasing inflationary pressure and the chances for an extended recession.

With the President soon to announce a new CEO and Chief Restructuring Officer for Eskom, and details on the R230bn fiscal support bill to be announced by Finance Minister Tito Mboweni, the fate of the nation hangs in the balance.

As of 0640 GMT, the Rand was trading at 14.38 to the Dollar, 0.2% weaker than its New York close on Thursday.

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