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Power crisis knocks South Africa economy

By Staff Reporter

Nhlanhla Nene, finance minister©Bloomberg

Nhlanhla Nene, finance minister

A deepening power crisis that has triggered almost daily outages across South Africa, hitting key industries as well as households, has forced the government to sharply downgrade its growth forecast for the year.

Nhlanhla Nene, the finance minister, highlighted energy supply as the government’s critical challenge as he projected that growth for the year would be 2 per cent, down from the 2.5 per cent the Treasury forecast in October.

“Our primary challenge is to deal with the major structural and competitiveness challenges that hold back production and investment in our economy,” Mr Nene said. “Electricity constraints hold back growth in manufacturing and mining and also inhibit investment in housing and raise costs for businesses and households.”

He was speaking as he delivered an austere budget that reins in government expenditure by R25bn ($2.2bn) over the next two years and raises income tax 1 per cent for all but the country’s lowest earners. It is the first such tax rise since the 1990s as the government tries to curb debt and the budget deficit, while grappling with the bleak outlook.

The power crisis is the latest problem to afflict South Africa’s ailing economy, which has struggled to recover from a 2009 recession. It has been plagued by increasing labour unrest, rising costs and complaints of policy uncertainty under the leadership of President Jacob Zuma. Data released on Tuesday revealed that the economy grew 1.4 per cent last year, its lowest level since the recession, largely because of a five-month wage strike in the important platinum sector and a separate dispute that saw about 220,000 metalworkers and engineers down tools for several weeks.

The government estimates that it needs growth of more than 5 per cent to tackle widespread poverty and unemployment, and to narrow yawning inequalities that continue to blight the country 21 years after its first democratic election.

Africa’s most developed economy has been weighed down by severe energy constraints for several years, a problem blamed on poor management and lack of investment in the sector. But the situation has worsened this year as Eskom, the troubled state utility, has battled to keep its ageing, under-maintained infrastructure going.

South African GDP

The utility has been putting off scheduled maintenance since South Africa hosted the 2010 football World Cup as its priority has been keeping the lights on.

Eskom is also challenged financially as it faces a R225bn funding gap over the next five years and struggles to source and pay for the huge quantities of diesel it needs to power gas turbines that are providing essential support to the creaking system. Mr Nene announced in October that the government would provide the utility with a R23bn cash injection through the sale of non-core assets. His announcement fuelled speculation that the government could look to dispose of its 14 per cent stake in Vodacom, the mobile phone operator, and more detail was expected in the budget.

But Mr Nene offered little clarification, other than saying the R23bn would be paid in three instalments, with the first R10bn transferred by June. “We are at an advanced stage to complete the leveraging of those resources [non-core assets],” he said.

The Treasury said a “ministerial electricity war room” was working to address issues that included short-term funding, accelerating the completion of two coal-fired plants that would add 9,600MW to the grid — which were already delayed by more than two years — and getting up to 2,500MW into the grid from independent power producers by 2020.

Frequent unplanned outages and low plant availability are expected to persist for the next three years– SA Treasury

But it warned that “frequent unplanned outages and low plant availability are expected to persist for the next three years.”

The grim outlook has caused the government to focus on fiscal discipline, with the Treasury hoping that a combination of lower spending and increased taxes will reduce the budget deficit from an estimated 3.9 per cent of gross domestic product in the past financial year to 2.5 per cent by 2017-18. In addition, it projects that net debt will stabilise at 44 per cent of GDP over the same period.

-FT

 

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