Lack of power topples the rand

File photo: Reuters

File photo: Reuters

Published Dec 9, 2014

Share

The fallout from South Africa’s power crisis has sent the rand plunging to a six-year low, compounding the challenges faced by the economy.

Eskom chief executive Tshediso Matona tried unsuccessfully to reassure the country about the power producer’s ability to avert power cuts at a media conference starting at 2pm yesterday.

Instead of instilling confidence, Matona’s words sent the the rand tumbling from R11.48 before he started talking to R11.57 against the dollar, the lowest level since October 2008.

Also weighing on the rand was data showing that the country’s current account deficit in the third quarter was worse than anticipated.

Even before the latest power crisis, South Africa was confronted by prospects of slower growth after mining – the single biggest foreign currency earner – went into free-fall following industrial strife in the platinum sector.

Now Eskom’s woes are poised to exacerbate concerns about the economic outlook, according to analysts and economists.

Mike Schussler, the chief economist at research group Economists.co.za, said South Africa’s potential economic growth had been reduced to 2.5 percent a year since 2007 from 4 percent annually.

He said the power outages were putting jobs at risk by reducing economic growth by as much as 0.3 percent this year.

Isaac Matshego, a Nedbank economist, confirmed that the impact of load shedding on production and exports had raised investor concerns over the performance of the economy.

He said the respite the economy had had from lower oil prices and the subsequent drop in food prices would not last, and would instead be eroded by the pressure that would come to bear on the rand.

Matshego said if the energy supply problems persisted, the currency would probably weaken even further, and did not rule out a slide to R12 to the dollar.

“We were expecting some pressure on the rand next year, with the UK and US possibly hiking interest rates, but if these [Eskom] problems become more severe, it will add more vulnerability to the rand,” he said.

While the rand is not the only emerging market currency facing difficulties, the challenges brought on by Eskom have quickened the pace of decline by fuelling inflation, which is destabilising the economy, and eroding investor confidence.

“Emerging markets are suffering slow growth, low commodity prices and weak exports,” Pierre-Yves Bareau, the London-based head of developing nation debt at JPMorgan Asset Management, said.

The weakening in the rand as a result of Eskom’s crisis could have a negative effect on inflation and in turn could put pressure on Reserve Bank governor Lesetja Kganyago to respond by hiking interest rates.

The decline in the petrol price had fuelled the hope that the central bank would keep interest rates flat for a number of months.

Related Topics: