SA power cri­sis ‘paral­y­ses econ­omy’

Lesotho Times - - Business -

NEW YORK — South Africa’s econ­omy could have been 10 per­cent larger if power short­ages hadn’t sti­fled growth and in­vest­ment and put the na­tion’s debt at risk of be­ing cut to junk, econ­o­mists’ es­ti­mates show.

Eskom Hold­ings SOC Ltd., which sup­plies about 95 per­cent of the coun­try’s elec­tric­ity, is ra­tioning sup­ply be­cause it can’t meet de­mand from aging plants fol­low­ing years of un­der­in­vest­ment.

Its chair­man stepped down last month af­ter los­ing the board’s sup­port over a de­ci­sion to sus­pend the chief ex­ec­u­tive of­fi­cer and three other top man­agers, leav­ing it with­out per­ma­nent lead­er­ship.

South Africa’s es­ti­mated eco­nomic ex­pan­sion of two per­cent this year could have been at least one per­cent­age point higher had it not been for the cuts, said Dawie Roodt, chief econ­o­mist at Ef­fi­cient Group Ltd.

Rolling black­outs have curbed min­ing and man­u­fac­tur­ing, both knocked by strikes that limited 2014 growth to the slow­est pace since a 2009 re­ces­sion, and prompted rat­ing down­grades.

“If we’d had enough elec­tric­ity since 2007 and it was not a lim­it­ing fac­tor, the econ­omy could have been about 10 per­cent big­ger than it ac­tu­ally was by the end of 2014,” Pre­to­ri­abased Roodt said. “That is more than R300 bil­lion rand, or more than a mil­lion job op­por­tu­ni­ties.”

Koe­berg Bolt The state-owned power util­ity’s strug­gle to meet de­mand started as far back as De­cem­ber 2005, when a loose bolt dam­aged one of the gen­er­a­tors at its Koe­berg nu­clear plant near Cape Town.

Break­downs and mul­ti­year de­lays in bring­ing new gen­er­at­ing fa­cil­i­ties onto the na­tional grid have since led to ex­tended pe­ri­ods of sched­uled black­outs.

The util­ity is try­ing to build new fa­cil­i­ties to avoid a re­peat of 2008 cuts that forced mines and fac­to­ries to halt pro­duc­tion for five straight days.

Eskom is strug­gling to plug a R225 bil­lion fund­ing gap re­quired to build new plants and main­tain ex­ist­ing ones. Fi­nance Min­is­ter Nh­lanhla Nene said in Fe­bru­ary the util­ity will re­ceive 10 bil­lion rand in June, the first pay­ment of a 23 bil­lion-rand cash in­jec­tion from the sale of state as­sets.

The Na­tional Trea­sury is cur­rently re­view­ing an ap­pli­ca­tion by the power com­pany to in­crease its prices by 25 per­cent. An­nual in­fla­tion was 3.9 per­cent in Fe­bru­ary.

Rat­ing Ef­fect “The gov­ern­ment pre­vi­ously was fo­cused on main­tain­ing the sovereign rat­ing at all costs but now, they must also be con­cerned of the feed­back from Eskom into the sovereign,” Peter At­tard Mon­talto, a Lon­don-based econ­o­mist at No­mura In­ter­na­tional Plc, said in an e-mailed re­sponse to ques­tions on March 31.

Stan­dard & Poor’s rates South African debt one level above junk and be­low the as­sess­ments of Fitch Rat­ings Ltd. and Moody’s In­vestors Ser­vice. S&P cut its eval­u­a­tion in June, while Fitch low­ered the out­look on its read­ing to neg­a­tive that month.

“The woes of Eskom are putting huge strain on the cred­it­wor­thi­ness of the sovereign” rat­ing, Ni­cholas Spiro, man­ag­ing direc­tor of Lon­don-based Spiro Sovereign Strat­egy, said. “South Africa is caught in a vi­cious cir­cle in which the weak­ness of the econ­omy, the dearth of re­forms, the prob­lems at Eskom and the vul­ner­a­bil­ity of the rand are all feed­ing on each other.”

Man­u­fac­tur­ing Decline A gov­ern­ment re­port to­day will prob­a­bly show man­u­fac­tur­ing pro­duc­tion shrank 1.5 per­cent in Fe­bru­ary fol­low­ing a de­crease of 2.3 per­cent in Jan­uary. The in­dus­try’s con­tri­bu­tion to the coun­try’s gross do­mes­tic prod­uct de­clined to 13.3 per­cent last year from 16.3 per­cent in 2007, statis­tics of­fice data show.

“We do we see elec­tric­ity as a very bind­ing con­straint on South African growth,” Peter Wor­thing­ton, an econ­o­mist at Bar­clays Africa Group Ltd.’s Jo­han­nes­burg­based in­vest­ment-bank­ing unit, told re­porters Wed­nes­day. Power cuts are “the man­i­fes­ta­tion of th­ese con­straints on growth,” he said.

Fac­tory own­ers are wary of com­mit­ting large sums of money in Africa’s most in­dus­tri­al­ized econ­omy be­cause of er­ratic power sup­ply, ac­cord­ing to the Man­u­fac­tur­ing Cir­cle, whose mem­bers in­clude the lo­cal unit of Arcelormit­tal and ce­ment maker PPC Ltd.

FDI Drop “If you’re go­ing to spend a bil­lion rand, you need to have some surety that there’s go­ing to be elec­tric­ity avail­able,” Paul Curnow, an en­ergy ex­pert at the Man­u­fac­tur­ing Cir­cle, said by phone from Jo­han­nes­burg on March 31. “Peo­ple are just sim­ply not build­ing new projects right now.”

For­eign di­rect in­vest­ment into South Africa was 62 bil­lion rand in 2014, down from 80.1 bil­lion rand the pre­vi­ous year, Re­serve Bank data show. The rand has weak­ened 41 per­cent against the dollar since the start of 2007 and strength­ened 0.8 per­cent to 11.7964 at 11:34 a.m. Tues­day in Jo­han­nes­burg.

Fre­quent un­planned cuts and low plant avail­abil­ity will prob­a­bly persist for the next three years, the Na­tional Trea­sury said in Fe­bru­ary.

“The short­age of elec­tric­ity to my mind is one of the key fac­tors that in­vestors look at,” Axel Schim­melpfen­nig, rep­re­sen­ta­tive of the In­ter­na­tional Mon­e­tary Fund in South Africa, said in Jo­han­nes­burg on March 31. “Even if you think South Africa is an at­trac­tive des­ti­na­tion, you can wait — you can come in one year or two years when the power sit­u­a­tion is hope­fully more sta­ble.”

— Bloomberg.

THE re­li­a­bil­ity of the en­ergy sup­ply from trou­bled state-owned provider Eskom is among the chal­lenges fac­ing South Africa’s econ­omy

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