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Investors eye nuclear vs political power in SA

Sep 27 2016 07:49
Carin Smith

Cape Town - Political power and nuclear power in South Africa are currently key topics of interest to investors, emerging markets economist Peter Attard Montalto of Nomura said on Monday.

"We reiterate our existing views on political power not having shifted, though some risk of erosion of ‘foundations’ is occurring," explained Montalto.  

He added that investor interest in South Africa's nuclear plans is currently piqued, not so much about what he calls the end point, but rather about the process of getting there and what it does fiscally and to politics.

"Nuclear tendering will likely consume political capital into year-end as it grinds forwards," said Montalto.

READ: Eskom may have R150bn war chest to spend on nuclear

Nuclear power

Regarding the nuclear issue, Montalto said the Department of Energy has indicated it expects to move to hard tendering - the stage which requires National Treasury to sign off - by year-end. In his view, in reality this may well move to the first quarter of next year.

"As we have commented previously, this puts much more immediate pressure on President Jacob Zuma on what to do with National Treasury," said Montalto.

"Our view remains that nuclear as a technology is of interest, but that on a fully-loaded life time cost comparative basis versus gas especially makes little sense. Similarly, such mega projects cannot be brought in on time and on budget and without rent extraction within the SA context."
 
He added that increasing energy efficiency of demand and improved supply efficiency from Eskom, with Medupi and Kusile coming on stream alongside renewables, will add around 12.5GW of electricity - and that is even before one gets to Coal-III and gas tenders in a low growth environment.

"We are still sceptical about whether nuclear will happen – by which we mean a new nuclear power station that will add electricity to the grid.

"However, we may well get further down the process even to breaking ground, but the force of civil society and political opposition (including in the ANC) should not be underestimated," said Montalto.

READ: ANALYSIS: The cost of nuclear electricity in SA

Political power

A key question for the market is the level of Zuma’s power – in absolute and relative terms, according to Montalto.

"We do not believe power within the National Executive Committee (NEC) has shifted at this time, but the foundations of Zuma’s power – the structures that support and perpetuate it (and his faction) - have started to shift," he explained.
 
"The foundations of Zuma’s power come from his access to so-called security networks that include the state security services and the ANC’s parallel security structures – but also cadre deployment of loyalists into key roles."  

According to Montalto, over time sufficient knocks may force a real shift in power dynamics within the NEC, and in turn into the coalitions formed in an elective conference that is the nub of where the ANC goes and how it affects investors in the medium run.

"The formation of coalitions between different elements of the ANC – most likely always involving the tenderpreneur faction at its centre – will dictate the outcome of the next elective conference," said Montalto.

"If there is some erosion of power in a true sense and factional coalitions form early ahead of an elective conference, this could place more constraints on President Zuma. We do not believe this has happened yet, but could be a topic for the middle of next year."

The problem, in Montalto's view, is that the more boxed in one faction becomes, the potentially less rational it can become in its bid to retain power.

"Ultimately, markets need to consider that the ANC has decided President Zuma will serve at least until the end of next year," he said.

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