Eskom's credit risk is soaring as South Africa’s state-owned electricity supplier girds for a battle with labor unions over wage demands it can’t afford.
Protests at most of the utility’s coal stations are ramping up after wage negotiations collapsed with the groups earlier this week. Because electricity is an essential service, industrial action is not permitted, 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 labour groups are still far from the below-inflation offers by Eskom, a loss-making business that can’t afford to service its R396 billion of debt without government bailouts.
Yields on the utility’s dollar bonds this week hit the highest levels 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, also the highest since December 2020.
Eskom on Friday cut 4 000 megawatts from the power grid, increasing load shedding across the country.
"Due to the unprotected labour action, Eskom is compelled to take precautionary actions to to conserve emergency generation reserves," spokesperson Sikonathi Mantshantsha said in a statement.
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. Eventually 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 in government debt, Ramkhelawan-Bhana said in a client note. Yields on benchmark 10-year government securities climbed five basis points on Friday to 10.62%.