Sa Power Constraint

SA power constraint an ‘underappreciated’ growth threat

South Africa’s power supply constraint has the potential to act as a “hand brake” on the country’s gross domestic product (GDP) growth outlook and is an “underappreciated” downside risk, a domestic banking group has warned.

In fact, Absa Capital economist Jeffrey Schultz describes that power shortfall as one of the “idiosyncratic” factors that is likely to act as a drag on domestic economic expansion during 2012, as well as over the medium term. It was also a factor in the Barclays affiliate’s decision to revise down its GDP outlook for 2012, from the 2.8% it forecast in December to the 2.7% outlined in its second-quarter outlook statement.

“We have trimmed our GDP forecast as we fear that further idiosyncratic shocks are likely to have hit output. Prolonged industrial action at one of the country’s largest platinum mines will hit mining production,” Schultz explains, referring to the 45-day strike action that occurred in the first quarter at Impala Platinum.

But he is equally concerned by the fact that South Africa’s electricity supply shortage has already seen some large industrial users being asked to curtail their demand.

The first significant additional supply is only expected to materialise in 2014/15 as the Medupi power station begins ramping up from the end of 2013, followed by production from Kusile and Ingula.

“Looking into quarter two, electricity is expected to remain a key downside risk, while we are also watching closely for any sign that the public sector wage negotiations could slip into a large strike.”

Power utility Eskom has called on South Africans, particularly large power consumers, to reduce electricity demand by 10%, or some 3 000 MW, to create the savings certainty needed to enable it to ramp up planned maintenance, as well as to create the space for growth-supporting new connections.

South Africa has avoided a return to rotational load shedding primarily owing to a slower-than-anticipated recovery in electricity demand following the 2008/9 recession.

But Absa Capital argues that there are indications that the recovery, while muted, is becoming more broad-based and that the productive sectors of the economy, such as mining and manufacturing, could begin contributing along with the consumer. In that context, inadequate electricity supply could “become a hand brake on GDP growth”.

“This is not to say that there has not been a lot of focus on electricity. Rather, the attention recently has been focused on price rather than supply,” Schultz notes, highlighting the recent announcement by the National Energy Regulator of South Africa that Eskom’s tariffs would rise by 16% from April 1 rather than by the previously agreed 25.9%.

The decision “will certainly tweak inflation forecasts a little lower”. But the pricing revision is unlikely to alter the outlook for inflation, given electricity’s 1.7% weighting in the current consumer price inflation (CPI) basket.

The group expects CPI to remain above the 3% to 6% inflation target band for the entire year, but for inflation to peak at 6.5% in the second quarter. But it also expects core inflation, excluding food and fuel prices, to become a more dominant feature during 2012.

“Our expectation is that core inflation, which had settled around 3.5% for much of 2011, will start to become a much larger driver of inflation in 2012,” Schultz says, adding that the bank expects core inflation to peak at around 5.5% by year-end.

Therefore, Absa Capital expects that the South African Reserve Bank will begin raising rates, in 50 basis-point increments, from November. Between November 2012 and the end of 2013, the group expects rates to have increased by 200 basis points.

Edited by: Creamer Media Reporter

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