Infrastructure shortcomings, weak macroeconomic indicators and vulnerable financial assets mean worrying times ahead. Local bankers remain confident, but are they being overly optimistic? Sudip Roy reports from Johannesburg.
THE C WORD is barely mentioned in any of the meetings that Euromoney has in Johannesburg. Yes, the economy and financial markets are heading for tougher times but no, the country is not in crisis.
South Africa is facing power outages, rising inflation, a big current account deficit, a collapsing currency, volatility in its financial markets, high unemployment and political uncertainty, so bankers could be forgiven for fearing the worst. The local financial community, however, is hardy.
Although all agree that the strong economic performance enjoyed for the past four years is well and truly over, few expect South Africa to go into financial meltdown, especially as the economy is expected to continue growing, albeit at a much slower rate.
Tom Boardman is chief executive at Nedbank, one of the country’s four biggest banks. He concedes that sentiment has turned negative over recent months. "Interest rate rises and continued pressure on prices have led to a real slowdown in consumer spending," he says. "Consumer indebtedness has increased. House prices are flat. Then there’s political uncertainty and the Eskom outages. All have hit the psyche."
Still, Boardman maintains that South Africa’s economic future is not as bad as it first appears. "We are not looking at a nightmare situation but a slowdown," he says.
He adds: "We’ve overcome worse before – in the late 1980s." That was when the country’s apartheid regime had such a deleterious impact on the economy.
Colin Coleman, head of Goldman Sachs’s country office, says: "This year will be complex. It’s the final one of the current government. It will be a tough year for deal-making. Growth will slow; inflation will pick up. But there are still solid underpinnings. I remain relatively positive even though there are a lot of headwinds to deal with."
Power shock
The biggest of those headwinds are the power cuts that have hit South Africa since the turn of the year. Unexpected demand for electricity meant that large parts of the country, including Cape Town and Johannesburg, experienced blackouts in January. The problem was so bad at one point that mining companies had to shut for five days for safety reasons.
At the heart of the problem is lack of government investment in the electricity industry. National supplier Eskom has said that electricity prices – which are among the lowest in the world – need to double by 2010 to fund the necessary infrastructure upgrades. Eskom plans to spend more than $40 billion increasing its generating capacity in the next five years.
So far the government has approved a 14.2% price increase for 2008/09 but Eskom wants that to be increased to 60%, primarily to cover higher fuel costs. In a submission to the national regulator, Eskom warned that if "the status quo remains, the price increase for 2009/10 will be almost 100%".
To ease some of the pressure, South Africa is receiving additional help from outside sources. Mozambique, for example, is to increase power supplies via its huge Cahora Bassa dam. More than 75% of the power generated from the dam is already sold to South Africa.
As welcome as that power will be, unless South Africa quickly addresses its infrastructural shortcomings the long-term consequences for the economy could be severe. Already there are some bad signs. Rio Tinto Alcan, one of the world’s biggest mining groups, is having second thoughts about building a $2.5 billion, 660,000 tonne capacity, aluminium smelter in an Eastern Cape industrial development zone because electricity supply cannot be guaranteed. The company wants new power plants built before giving the go-ahead for the project.
Local businesses are being affected too, with shops and restaurants particularly vulnerable to power cuts. "Electricity shortages hit everyone, especially small manufacturers and retailers," says Boardman. "If, as a retailer, you lose a day’s trading, it never comes back. So the outages in January really shook people."
Paul Harris, chief executive of FirstRand, another of the big four banking groups, says: "The power issue is a bit of an own goal." Harris acknowledges that the government should have planned better, although he believes that policymakers got caught short because of South Africa’s recent prosperity. "Whenever you have 4% to 5% growth for a sustained period you will run into capacity constraints if you are used to 2%," he says.
He even reckons the electricity setback could be used to help revive the economy. "The whole process of building capacity provides a stimulus to the economy," he says.
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"South Africa Inc is very underleveraged. Areas of demand are obviously there"
Jacko Maree, Standard Bank |
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Jacko Maree, chief executive at Standard Bank, South Africa’s biggest bank, says that the electricity shortages are a byproduct of a priority shift in the government’s infrastructure strategy to help develop the country’s poorest areas. "If you go to many of the outlying areas you will see basic infrastructure put in place. These were areas that had few roads and little running water. So there has been a change in priority. Within that process other issues, such as electricity, did not get the attention they should have," he says.
He adds: "The issue is hurting certain elements of the economy but the reality is not as bad as the perception."
Macroeconomic woes
Perception matters, however. The blackouts should be a great embarrassment to Africa’s most developed country. And although they are not as severe as they were a few months ago, the fact that they happened at all shows that, despite a sustained growth rate of 5% over the past few years, the economy has failed to fully reap the rewards of the commodity boom because of the infrastructure shortcomings.
More than that, these shortcomings are now producing bottlenecks and stoppages in the economy. Walter Molano, an emerging markets analyst at sell-side firm BCP Securities in Greenwich, Connecticut, says that South Africa provides a warning to other developing nations about what can go wrong if infrastructure investment is not maintained. "South Africa is an important lesson to Latin America as to what happens when a country does not invest in its basic infrastructure," he wrote in a research note in March.