World Bank gives $3.75 billion loan to Eskom

FRANKFURT (MarketWatch) -- The rand rose against the U.S. dollar on Friday, buoyed by the World Bank's approval of a $3.75 billion loan for South African power utility Eskom that aims to ease the nation's severe electricity shortages.

The loan is the World Bank's first major lending engagement with South Africa since the fall of apartheid 16 years ago. It was approved late Thursday and has a maturity of 28-and-a-half years.

In the currency markets, the greenback /quotes/comstock/21o!x:susdzar (CUR_USDZAR 7.2420, +0.0067, +0.0926%) fell 0.5% to 7.2310 rand, after trading at 7.27 rand late Thursday. The dollar hit an intraday low of 7.2052 rand.

"Sentiment is a little bit better than it was yesterday," said Nigel Rendell, senior emerging markets analyst at RBC Capital Markets, commenting on the strength of the rand.

"The other thing is that there has been a loan agreed with the World Bank to lend to Eskom," Rendell said. "It's a long-term loan and it allows them to spend money on infrastructure to prevent many of the power cuts we've had in the past. This eases the tensions, at least the near-term problem."

Of the total loan, $3.05 billion will be used to complete the 4,800-megawatt Medupi coal-fired power station. One wind and one solar-power project will be financed with $260 million, while $485 million will go toward low-carbon energy efficiency components.

"Without an increased energy supply, South Africans will face hardship for the poor and limited economic growth," said Obiageli K. Ezekwesili, vice president for the Africa region at the World Bank, in a statement.

The loan combines much-needed investments to boost generation capacity with creating jobs, Ezekwesili said.

South Africa's energy crisis of 2007 and early 2008, together with the global financial crisis, prompted the World Bank to give the loan.

State-owned Eskom generates 95% of the electricity used in South Africa and 45% of the electricity used in Africa, according to the firm's Web site.

South Africa, a major global producer of metals such as gold and platinum, has been plagued by electricity shortages for several years, constraining economic growth and investment in key industries.

Earlier this week, the chief executive of Xstrata PLC /quotes/comstock/23s!a:xta (UK:XTA 1,279, -21.00, -1.62%) /quotes/comstock/22a!xtan (CH:XTAN 20.90, -0.35, -1.65%) said the mining firm has put on hold a 5 billion rand ($690 million) investment in the expansion of its ferrochrome business because of South Africa's energy problems.

"Security of energy supply is crucial," said Mick Davis, CEO of Xstrata, in a speech to the Wits Business School in Johannesburg.

"A shortage of energy generation capacity has already stalled further investment in mining and beneficiation capacity, losing with it the potential for thousands of jobs and the associated revenue and foreign exchange this production would earn for the country."