Growth Interrupted

Global Finance, Apr 2008 by Guerrero, Antonio

Flagging global growth, an ongoing energy shortage and increasing wage and inflation pressure are weighing heavily on South Africa's economy.

South Africa has traditionally been regarded by investors as a gem in an otherwise troubled region, but with an energy crisis threatening economic growth and with the government plagued by corruption scandals, the gem may be losing some of its luster. Analysts, however, say the country is laying the groundwork for a speedy recovery.

During a televised speech before parliament in February, president Thabo Mbeki apologized to the nation for a nationwide energy shortage that has unleashed frequent power outages. "This situation has precipitated the inevitable realization that the era of very cheap and abundant electricity has come to an end," he said, adding that the problem would be resolved in a relatively short period.

The shortage comes due to the lack of energy-sector growth to match the country's post-apartheid economic boom. The government has toyed with privatizing the sector, but the proposal is a politically charged one, as much of the increased demand comes from black communities that had not previously been linked to the power grid. According to Eskom, the state-owned electrical utility, it will take as much as seven years for supply to catch up with the country's electricity demand.

Mbeki's emergency response plan calls for the rapid development of gas-turbine plants that, though less efficient, can be built relatively quickly. He also wants to encourage commercial and residential users to adopt more energy-friendly technology, while also seeking to reduce energy consumption among government agencies. Eskom has introduced an electricity-rationing plan that has made the power outages less frequent and more predictable.

Eskom, which supplies about 95% of the country's power, has a $39 billion investment program for the next five years. The government had contended last year that Eskom would have to finance its own expansion plans by securing loans and issuing bonds, but authorities now say the company will receive government funds for such purposes. Standard & Poor's put Eskom's BBB foreign currency rating on "negative watch" amid the crisis, as the rating agency feels the cost of the company's expansion program could turn out to be higher than expected.

The mining sector has thus far been among the most affected by the crisis.The nation's gold and platinum mines shut down for several days in January after Eskom could not guarantee enough power to safely operate elevators used to transport miners in and out of deep shafts. Eskom initially restricted energy flows to mining and industrial companies by 10% in January, though the figure has since been cut to 5%.

The cuts dealt a hard blow to De Beers, one of the country's mining groups. "De Beers cut its consumption of power in 2007 by almost 4% over the previous year," says David Prager, director of communications for the De Beers Group. "Having achieved that voluntary cutback, we were not anticipating the additional and unexpected 10% power cuts in January. The impact on our operations was major and concerning."

The company, however, remains optimistic, and Prager believes it can return toward full operational capacity again, despite the crimped power supplies. The company is working to gradually reduce energy usage by 15% through 2014 as part of targets set under an energy efficiency accord with the government. "This drop in production can make a big difference between a mine being profitable and loss-making," he explains. "We were fortunate that we had the [capacity] to handle the impact of the power shortage in such a way that it has not yet led to job losses."

Labor Troubles

Job losses are still expected. Buyelwa Sonjica, minister of minerals and energy, says job losses at the country's mines are unavoidable. Gold Fields, South Africa's second-largest gold producer (and fourth-largest worldwide), announced plans to cut as many as 6,900 jobs-13% of its workforce-because of the energy shortage, which it predicted would reduce its gold output by as much as 25% during the first quarter of 2008. Solidarity, a local trade union, predicts 15,000 jobs will be lost, though private analysts put the number as high as 80,000 jobs.

The National Union of Mineworkers, which has 280,000 members, has threatened to call for street protests if major job cuts are made. With South African mines employing more than 100,000 migrant workers from neighboring countries, the situation could have a spillover effect into Lesotho, Botswana, Mozambique and Swaziland, among other countries.

The overall economic impact on South Africa is yet to be determined, though outlooks remain mixed. South Africa is the world's largest producer of platinum and second-largest producer of gold. Yet mining contributes only 5.8% of GDP, with financial services (19.6%), manufacturing (16.3%), and wholesale and retail trade, hotels and restaurants (14.1%) remaining the country's top economic drivers. The degree of economic slowdown will depend on the impact of power shortages on sectors that go well beyond the country's mines.