SA energy crisis sends rand tumbling

South Africa is sitting on gold, platinum and other minerals that are selling at record prices on world markets, yet its economy is, quite literally, underpowered.

The rand, the worst performing currency this year, has lost 12% against the dollar in the past month since the country was hit with electricity shortages that kept mines from working. The rand reached a low of 7,87 to the United States dollar in early February.

Rising inflation and high interest rates coupled with political uncertainty has also made investors increasingly jittery about the country’s economic outlook. This month, analysts revised growth forecasts downwards from an expected 5% for the fourth consecutive year to 3,9%.

President Thabo Mbeki, who has presided over the country’s economic growth, steps down next year and is likely to be replaced by new leader of the ruling African National Congress, Jacob Zuma who faces charges of corruption, money laundering, fraud and racketeering.

”General business confidence in the economy has suffered,” said economist Iraj Abedian with Pan-African Capital Holdings, a financial services and investment company. ”Market uncertainty is weighing on the value of the rand.”

Mining companies, including some of the world’s largest gold and platinum producers, were forced to shut down for five days last month after the state electricity supplier, Eskom, could not provide a sbteady source of power.

Demand for electricity in the buoyant economy has outstripped supply. The government has acknowledged it failed to heed a 1998 Eskom warning that new power generation capacity would be needed.

Mines are now receiving 90% of their normal power supply, a situation which is expected to last the next four y ears.

The power shortage has caused losses in production with AngloGold Ashanti saying stoppages in January cost it 200 000 ounces. The company, Africa’s biggest gold miner, expects production to be down a further 200 000 ounces this year at present electricity supply rates.

Harmony Gold said Friday: ”In the light of Eskom’s electricity supply disruptions and with mines operating only at 90% of Harmony’s previous power supply, the company’s production for the March 2008 quarter will decrease.”

The slowdown in production has sent already high metal prices soaring. And South Africa can’t benefit because it’s not exporting.

High interest rates of 11% — introduced by the Reserve Bank to curb inflation — have helped reduce consumer debt but have also put a damper on economic growth and further cooled foreign investment in South Africa.

This lack of confidence is clearly evident in the bond and equities market, which have seen large-scale sell off of South African shares by foreigners this year. Last year the country saw a net inflow of $11-billion in bonds and equities. In the year to date there has been a net outflow of $3,8-billion.

SA ‘needs that money’

This capital outflow has caused further concern about South Africa’s large current account deficit and further weakened the rand. The deficit, which reached a 25-year-peak of 8,1% during the third quarter of 2007, has been funded by foreign buying of local stocks and bonds.

”It is difficult to see how South Africa is going to get out of this in the short-term,” said economist Mike Schussler of T-Sec, an investment holding company. ”If you are investing in a country you want high growth to give you a return, especially in equities. South Africa needs that money. But investors are looking elsewhere.

Schussler believes economic growth will slow to less than 2%.

”There is no way the South African economy will have the growth it has had in the past three, four years. We were well positioned in emerging markets but not anymore,” he said.

Citigroup economist Jean-Francois Mercier, said from a foreign investment point of view, South Africa’s power crisis couldn’t have happened at a worse time.

”At a time when the global economy is going through a slowdown phase — a recession in the US and stress in financial markets in other industrialised countries — risk aversion is great and investors are already more circumspect about investing in emerging countries. Then comes South Africa with its infrastructure problems brought to light by the power crisis,” he said.

In his recent State of the Nation address, President Mbeki sought to reassure local and foreign business communities. ”I am convinced that the fundamentals that have informed our country’s forward march in the last 14 years remain in place,” he said.

His potential successor, Zuma, has repeatedly emphasised that he does not plan to radically change South Africa’s economic policies.

However, Mercier said there was still some concern about the possible changes next year’s elections could bring, particularly if there is a change in those in charge of the economic ministries.

”Even though we are hearing the messages that policies will not change, let’s see what happens when the new government comes in,” he said. ”This is a period of transition.”

Budget day

Meanwhile, Finance Minister Trevor Manuel is to table the national budget on Wednesday.

Nedbank’s group economic unit said the budget comes at a time of much uncertainty. Higher interest rates, the current electricity crisis and fading global growth prospects are undermining confidence, it said in a statement.

It is critical that the budget deal with the current electricity constraints in a decisive manner, including incentives to encourage energy savings as well as support for short-term additions to electricity capacity.

The government should start the new fiscal year on a strong financial footing, with the outcomes for 2007 and 2008 likely to be broadly in line with the estimates set out in October’s Medium-Term Budget Policy Statement (MTBPS).

However, the estimates for 2008 and 2009 and beyond now seem unrealistic. The forecast for economic growth is likely be revised downwards, implying that revenue will probably come in significantly below October’s expectations.

Yet the pressure to improve services and address infrastructure constraints has increased. These realities will make it difficult to achieve the MTBPS’s planned budget surplus, the unit said.

Given the commitment to fiscal discipline, Manuel might opt for a small budget deficit, with a counter-cyclical element in the form of moderate tax relief and slightly more aggressive spending.

The tax relief should be focused on companies. Such a move would bolster business confidence at a time when the economy is slowing and companies are expected to make significant sacrifices to overcome the electricity constraints.

On the spending side, the focus should remain on social welfare and infrastructure spending, Nedbank said.

PricewaterhouseCoopers said it expects a budget that continues to advance a less regulated system better reflecting the reality of doing business globally. However, it cautioned there could be short-term fallout from the detailed rules designed to shepherd the transition.

Two prominent hallmarks of a modern Western economy still not seen in South Africa are group taxation and the abolition of exchange control. While it is unlikely these will be introduced this year, it is possible the budget will take further the measures that already set the scene for their implementation, the company said in a statement.

Under group taxation, all companies in a group are considered a single consolidated taxpayer — rather than as separate, stand-alone taxpayers — preventing the group’s use of one company’s losses to offset the taxable profits of another.

Similarly, it is expected that many of Manuel’s announcements on Wednesday will pave the way for an economy without exchange controls. – Sapa-AP, Sapa

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