South Africa Power Report Q4 2012

BMI View: The latest monthly electricity indicators reported by Stats SA evidence that BMI's relativelybearish outlook for South Africa's power sector in 2012 has fully materialised, with the total volume ofelectricity available for distribution down 2.74% year-on-year (y-o-y) in H112. This trend is largely areflection of steady but tepid headline economic growth, as well as various external headwinds.

Accounting for both political and economic developments, we thus believe that risks will be weighted tothe downside in the coming months. That said, relatively positive demographic and economicfundamentals, together with some big-ticket projects that are under construction or in the pipeline,support a cautiously optimistic outlook in the medium-to-long term.

As predicted over previous quarters, a combination of self-reinforcing domestic and global headwinds ishindering the potential of the South African power market this year:

The latest data from the South African Reserve Bank (SARB) has reinforced our Country Riskteam's view that South Africa will see tepid growth over the medium term, forecasting that realGDP will expand by 2.5% in 2012 and 3.3% in 2013, with risks weighted to the downside.

The temperature in the political environment is running high in the run-up to the ANC electionsin December 2012. The so-called 'Marikana Massacre' is weighing heavily on investorsentiment. Furthermore, the incident and the subsequent handling thereof has undoubtedly put adent in support for Zuma, fuelling policy uncertainty.

Although the outlook for domestic growth is weak, the upside risks to inflation stemming fromfood prices and union wage bargaining remain pertinent, curtailing the scope for a much neededraise in power tariffs. A point evidenced by the fact that state power group Eskom had to reducethe power tariff increase due in April by almost 10 percentage points, and forced the company topropose a new five-year plan in September 2012.

Cumbersome bureaucracy presents an additional potential stumbling block for many multibilliondollar power projects that are in the pipeline and in need of external financing.

However, despite this backdrop of bleak growth outlined above for 2012, we remain of the view thatpositive demographic and economic fundamentals (including substantial reliance on and development ofenergy-intensive industries), together with some big projects under construction or in the pipeline,provide support for a relatively optimistic outlook in the medium-to-long term. New generating capacityis necessary to meet growing demand, as illustrated by the continued shortages, as well as by recent newsthat Eskom's margin between available capacity stood at a mere 1% in September 2012.