Power crisis cripples investment, risks rating

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Johannesburg - The country's economy could have been 10% 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, which supplies about 95% of the country’s electricity, is rationing supply because it can’t meet demand from aging plants following years of underinvestment. Its chairperson 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.

READ: Tsotsi quits as Eskom chairperson

The estimated economic expansion of 2% this year could have been at least 1 percentage point higher had it not been for the cuts, said Dawie Roodt, chief economist at Efficient Group.

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% bigger than it actually was by the end of 2014,” Pretoria-based Roodt said by phone on April 2. “That is more than R30bn, 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 multi-year delays in bringing new generating facilities onto the national grid have since led to extended periods of scheduled blackouts, also known as load shedding . 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 R225bn funding gap required to build new plants and maintain existing ones. Finance Minister Nhlanhla Nene said in February the utility will receive R10bn in June, the first payment of a R23bn cash injection from the sale of state assets.

The national energy regulator is currently reviewing an application by the power company to increase its prices by 25%. Annual inflation was 3.9% 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, said in an emailed response to questions on March 31.

Standard & Poor’s rates South African debt one level above junk and below the assessments of Fitch Ratings 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 in an e-mailed reply to questions on March 31.
 
“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.”

Owners wary

A government report on April 9 will probably show manufacturing production shrank 1.5% in February following a decrease of 2.3% in January. The industry’s contribution to the country’s gross domestic product declined to 13.3% last year from 16.3% in 2007, official data showed.

Factory owners are wary of committing large sums of money in Africa’s most industrialised economy because of erratic power supply, according to the Manufacturing Circle, whose members include the local unit of ArcelorMittal [JSE:ACL] and cement maker PPC [JSE:PPC].

“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.”

READ: The rise and fall of Eskom - and how to fix it now

Foreign direct investment into South Africa was R62bn in 2014, down from R80.1bn the previous year, Reserve Bank data show. The rand has weakened 41% against the dollar since the start of 2007 and was trading at R11.82 at 11:17 on Wednesday 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.”

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