Power cuts may spook investors

An electricity shortage that has led to frequent power disruptions in South Africa could chase away investors, denting growth and portfolio inflows and weakening the rand.

Most market players have not fully priced-in the effects on the economy of the daily power failures, which could be even worse than the impact of global market turbulence if the problem persists, analysts said on Tuesday.

Industries and residential areas have been hit by daily electricity cuts as Eskom struggles to cope with growing demand.

Economists estimate the cost to the economy has run into hundreds of millions of rands, adding to the woes brought on by the steep falls in financial markets triggered by growing fears of a US recession.

”The potential impact is a lot greater than the international [market] turbulence if you find that South Africa has run into a wall in terms of how business can invest and how the economy can grow,” said Nicholas Kennedy, head of emerging markets at 4CAST in London.

”With the backdrop of the rand weakening, the global growth slowing and the dependence South Africa has on portfolio financing, anything that can potentially dent economic growth is very negative for local equities and the current account financing,” he said.

The country’s current account deficit stood at 8,1% of gross domestic product in the third quarter of 2007 and is seen remaining wide as the country spends billions of dollars on imports to develope its infrastructure.

Flagging capacity

Eskom plans to spend R300-billion ($43,27-billion) to boost flagging power capacity over the next five years and has warned it might be forced to ration the energy source in the meantime.

The state utility said this week it was importing electricity from Mozambique, Zambia and the Democratic Republic of Congo and was also working at bringing back into operation three power stations shut down in the 1980s.

The governnment has vowed to resolve the power crunch, which has cast a shadow over South Africa’s hosting of the Soccer World Cup tournament in 2010 and could also discourage much needed foreign capital.

”In so far as the economy is concerned these power cuts make South Africa less attractive for investment,” said Jac Laubscher, group economist at Sanlam.

”Portfolio investment is very sensitive to economic growth as that drives company earnings growth. We have managed to attract meaningful inflows in the past four years … but if that falls back then on balance it implies that it will be difficult to finance the current account deficit,” he said.

The power cuts would increase production costs and feed inflationary pressures, Laubscher added.

A gaping current account deficit has been a niggling worry for the rand, which has fallen 6% against the dollar so far this year and has also not been left unscathed in recent weeks by increasing fears that the US economy could drag the world into a recession.

Analysts said the country’s electricity woes would add on to bruised domestic financial markets’ woes.

”The power problem is just another negative on the list, the situation is compounded by global turbulence and the political uncertainty [in the country],” said Carmen Nel, economist at Merrill Lynch in Johannesburg.

Nel was referring to fears that new ruling African National Congress leader Jacob Zuma could push through investor-unfriendly economic policy changes given his strong ties with the left and trade unions. – Reuters

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