S.Africa's currency falls despite riches - Mercedes-Benz Forum

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S.Africa's currency falls despite riches

Finally, a currency falling faster than the US dollar.

S.Africa's currency falls despite riches
By CELEAN JACOBSON, Associated Press Writer
Wed Feb 20, 12:49 AM ET

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 percent against the U.S. 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 dollar in early February.
Rising inflation and high interest rates coupled with political uncertainty have also made investors increasingly jittery about the country's economic outlook. This month, analysts revised growth forecasts downward from an expected 5 percent for the fourth consecutive year to 3.9 percent.

President Thabo Mbeki, who has presided over the country's economic growth, steps down next year and is likely to be replaced by the 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 Iraj Abedian, an economist 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 steady 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 percent of their normal power supply, a situation that is expected to last the next four years.

The power shortage has caused losses in production, with AngloGold Ashanti Ltd. 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 Mining Co. said Friday: "In the light of Eskom's electricity supply disruptions and with mines operating only at 90 percent 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 percent — introduced by the Reserve Bank to curb inflation — have helped reduce consumer debt but have also dampened economic growth and further cooled foreign investment in South Africa.

This lack of confidence is evident in the bond and equities market, which have seen large-scale selling of South African shares by foreigners this year. Last year, the country saw a net inflow of $11 billion in bonds and equities. So far this year, there has been a net outflow of $3.8 billion.

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 percent of gross domestic product 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 percent.

"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 that 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 U.S. and stress in financial markets in other industrialized 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 emphasized 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."

Copyright © 2008 The Associated Press.
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