As South Africa's state-owned electricity supplier girds for a battle with labor unions over wage demands it can't afford, Bloomberg Holdings SOC Ltd.'s credit risk is soaring.
Protests at most of the utility's coal stations are going up after wage negotiations collapsed with the groups earlier this week. Industrial action is not permitted because of the fact that electricity is essential service, but intimidation and operational disturbances have grown and could add to existing constraints to the grid that have resulted in nationwide power outages, according to Eskom.
Demands by labor groups are still far from the below-inflation offers by Eskom, a loss-making business that can't afford to service its 396 billion rand of debt without government bailouts.
The yields on utility s dollar bonds hit the highest level since the Pandemic, with spreads of 2028 securities over US Treasuries widening to the most since December 2020. The cost of insuring Eskom's debt against default for five years using credit-default swaps climbed 55 basis points this month to 480, the highest since December 2020.
Eskom has cut 4,000 megawatts from the power grid, which has resulted in rolling blackouts across the country.
According to a statement from Sikonathi Mantshantsha, Eskom must take precautionary actions to conserve emergency generation reserves because of the unprotected labor action.
The last standoff between the sides in 2018 started with Eskom saying it couldn't afford increases and deteriorated into similar protests that resulted in power cuts. It capitulated with pay raises of 7.5% in a three-year deal.
Eskom s rising borrowing costs could add pressure on government finances and weigh on economic growth if it leads to sustained power cuts. That could put pressure on government bonds, said Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank in Johannesburg.
The threat of industrial action at Eskom over wage disputes could be a catalyst for a selloff of government debt, Ramkhelawan-Bhana said in a client note. The yield on benchmark 10 year government securities went up five basis points to 10.62% on Friday.
The Age of Credibility for Central Banks is not over, as a result of the Age of Credibility for Central Banks.