SA's credit rating under cloud
January 28, 2008
By Ethel Hazelhurst
Johannesburg - By cutting export revenue and discouraging foreign investment, Eskom's generation crisis could put South Africa's investment grade credit ratings at risk, Ian Cruickshanks, head of Nedbank Capital's strategic research unit warned at the weekend.
A fall to a subinvestment-grade rating would increase the cost of capital to all domestic borrowers, boosting inflation further.
The rand is also under threat after the local mining industry halted operations on Friday and oil producer Sasol reduced production. The closures were announced after public power utility Eskom warned that it could not guarantee continuous electricity supply for another two to four weeks.
Azar Jammine, chief economist at Econometrix, said the mining industry accounted for 15 percent to 17 percent of electricity demand.
If the mining closures continue, the fragile currency will weaken, lifting inflation, which is already well above the Reserve Bank's 3 percent to 6 percent target range. There will also be a second-round effect.
The closures by Goldfields, AngloGold Ashanti and Harmony sent the gold price to a record $923.60 (R6 648) an ounce on Friday, according to the Independent in London; while the closures by Anglo Platinum and Impala sent platinum to a record $1 694.90, according to Bloomberg.
Cruickshanks said that the rand fell from a best level of R6.95 to the dollar on Friday morning to R7.15 after the announcements. It closed at R7.09.
The JSE gold index fell 5.82 percent on the day and the oil and gas index lost 4.38 percent, reacting to the likely effect of electricity interruption on oil-from-coal producer Sasol.
Cruickshanks said the mining sector contributed about 6 percent of gross domestic product (GDP) and mining products about 40 percent of total exports, while the mines employed about 500 000 mineworkers.
Jammine said direct losses to GDP would equal about 0.14 percent a week during the closures.
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