By Olivia Kumwenda-Mtambo, Wendell Roelf and Mfuneko Toyana
CAPE TOWN (Reuters) - South Africa will bail out state utility Eskom with 69 billion rand ($4.9 billion) over three years, the centrepiece of a budget 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 before the parliamentary election, has made reforming Eskom one of his top priorities as its 420 billion rand debt pile poses a direct threat to Africa's most developed economy.
Analysts said the financial support would give the ailing power firm several years to implement a restructuring plan which will see it split into separate entities for generation, transmission and distribution.
But it still leaves Eskom, which last week subjected South Africa to the worst series of power cuts in several years, facing an uncertain future with unsustainable debts, crippling costs and stagnant sales.
"The money for Eskom is insufficient given the length of time over which the Eskom reorganisation will occur and the practical and political pitfalls that are ahead," said Peter Attard Montalto, head of capital markets research at Intellidex.
Those pitfalls 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 governing party still loyal to his scandal-plagued predecessor Jacob Zuma.
In his maiden budget speech, Finance Minister Tito Mboweni told parliament the emergency funds for Eskom would be financed through reprioritised spending and increased borrowing, but he rejected Eskom's request that the state take on 100 billion rand of its 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."
He raised the possibility of selling off more than 100 parastatals, often cited as a risk to the public purse.
"Isn't it about time the country asks the question: do we still need these enterprises?" Mboweni asked.
The rand and benchmark 2026 government bond initially fell as the budget forecast wider deficits, rising debt and slower economic growth, before later strengthening as it became clear the state would not carry Eskom's debt.
Eskom's 2023 and 2025 dollar bonds also strengthened.
But rising government debt levels in a low growth environment will remain a concern for ratings agencies.
"South Africa's budget highlights the government's limited fiscal flexibility. The budget shows a further erosion in fiscal strength," Moody's, the last of the top three agencies to have South Africa at investment grade, said of the budget.
Moody's is due to announce a ratings decision at the end of March.
Eskom Chairman Jabu Mabuza said Wednesday's support would cover two-thirds of the company's annual debt-servicing needs.
"It is never going to be enough, but it is what can be found in the circumstances," Mabuza told CNBC Africa. "We need to put more pressure on our operational costs."
He said the utility hoped the energy regulator would agree to the large tariff hikes Eskom had requested when it announces a decision around mid-March. The regulator has in the past tended to approve smaller increases that Eskom has asked for.
Some business leaders wanted more detail on how Eskom's debt mountain would be reduced over the longer term.
Eskom received a 60 billion rand bailout in 2008 via a loan which was later converted into equity. The government later sold state assets to give it another 23 billion rand.
"We were hoping that the government was going to look at debt and take some of the burden off the utility, but unfortunately that didn't materialise," said Tanya Cohen, chief executive of Business Unity South Africa.
Eskom's turned off the lights across swathes of the country last week 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 finance ministry said on Wednesday that strategic equity partners would be invited to provide capital and strengthen oversight in a new Eskom transmission subsidiary.
The budget predicted gross domestic product growth of 1.5 percent in 2019, down from a 1.7 percent forecast in October. The budget deficit is seen narrowing to 4.0 percent in the 2021/22 fiscal year from 4.5 percent in 2019/20.
The finance ministry also raised the expenditure ceiling by 16 billion rand over three years to find money for Eskom.
(Reporting by Olivia Kumwenda-Mtambo, Wendell Roelf and Mfuneko Toyana; Additional reporting by Alexander Winning, Tiisetso Motsoeneng and Joe Brock in JOHANNESBURG and Karin Strohecker in LONDON; Editing by Alexandra Zavis and Edmund Blair)