South Africa’s power crisis may already have damaged economic growth, even though the country’s mines have bounced back after electricity shortages brought production to a halt.
The longer it takes power utility Eskom to boost energy output for industry, the greater the chances that 2007 could have marked the end to four years of brisk economic growth at about 5%.
South Africa’s gold and platinum mines, the lifeblood of the economy, stopped work for five days last month as Eskom imposed rolling power cuts across the country. Many analysts have already factored the impact into their forecasts of gross domestic product (GDP) growth.
Even if mines make up for lost output, Eskom’s plans to ration power could cut 2008 growth down to 4% at most, said Bureau for Economic Research (BER) economist Pieter Laubscher.
”At the moment the number that we are working on is a 3,9% baseline forecast for GDP growth. A worse-case scenario would be about 3,4%,” Laubscher told Reuters.
”This is mainly the mining effect … The baseline assumption is that we recover in the second quarter, that the mines sort of recover, even with the rationing of electricity consumption,” he added.
Reserve Bank Governor Tito Mboweni said last week risks to growth appeared on the downside, with the global slowdown threatening a spillover effect on South Africa.
This was likely to be reinforced by the prevailing electricity supply disruptions, Mboweni said. But he ruled out the possibility of a recession in Africa’s biggest economy.
The electricity woes could also hamper South Africa’s preparations to host the 2010 Soccer World Cup, which officials hope will bring in huge amounts of cash.
Harshest on mining, manufacturing
Elna Moolman, an economist at Barnard Jacobs Mellet Securities, said the effect would be harshest on mining and manufacturing, where high energy consumption made it difficult to use alternative sources such as generators.
”The impact on other sectors will likely be more indirect, through the consequent slowdown in economic growth and demand for their products. We are also concerned about the possible impact on the trade and current-account deficits,” said Moolman.
The current-account deficit stood at 8,1% of GDP in the third quarter of 2007 and analysts believe that worries about growth could affect investors’ perceptions of South Africa’s ability to finance the shortfall.
The electricity woes would have their most visible effect on growth in the first quarter of 2008, which could be less than half the 4,5% annualised expansion in the previous quarter, Deutsche Securities economist Michael Biggs said.
The shortages have coincided with a slowdown in consumer demand. This has been the main driver of growth in recent years, but is waning as households feel the pinch of interest-rate increases totalling 400 basis points between June 2006 and December last year to stem inflation.
”I would say that of the 5% growth rate that we had over the past four years, a big chunk of that was a very strong consumer boom,” said the BER’s Laubscher.
”The consumer boom has come to an end and we’re not going to see the same sort of momentum any time soon, given the limited scope to cut interest rates going forward,” he said.
But some analysts such as Citigroup’s Jean-Francois Mercier believe there is a chance of minimising the blow to growth.
Mercier noted Eskom’s plans to revive old power stations to boost short-term capacity, and that Brazil had overcome its own power crisis in 2001/02.
”But downside risks prevail, in particular that investment and, in turn potential growth, suffer,” he said. ”A long-term policy response will be required to prevent the problem from recurring over the coming years, with a more significant negative impact on economic growth and investor sentiment.” — Reuters