South Africa needs to do much more to uplift economic productivity, with the improvement in electricity supply unlikely to transform the country’s supply-side performance on its own over the medium-term outlook, said Fitch Ratings on Friday.
Eskom electricity supply has improved over the past few months, bringing much respite to industry producers and miners that had battled against the backdrop of load shedding. However, the Minerals Council of South Africa has flagged the cost of electricity as a major driver of input costs for the sector.
Now, according to analysts at Fitch, South Africa’s production and supply-side will not benefit much from the stable electricity supplies unless the Government of National Unity addresses other attending challenges, which include high unemployment.
“More reliable power will not transform South Africa’s supply-side performance over the medium term, although it should result in a significant reduction in supply-side constraints in the next couple of years,” said Fitch Ratings last week.
Fitch now projects South Africa’s potential growth rate at 1% over the next five years, which is an improvement on the past few years. However, it flagged that this was “still very low by emerging-market” standards.
This comes against the backdrop of estimates that show that load-shedding in the past five years has negated South Africa’s GDP growth by the equivalent of 0.6 percentage points a year. Fitch, however, acknowledges that “power cuts could ease significantly as load shedding has been far less frequent” this year.
Nonetheless, the reductions in the frequency of power cuts in SA are only a fraction of the supply-side frameworks that need to be at optimum levels.
“South Africa’s supply-side performance deteriorated sharply from 2008, and has been extremely poor by global standards. Labour utilisation has steadily declined as the unemployment rate has risen to one of the highest in the world, and the informal sector has not expanded to absorb unemployed workers,” noted Fitch.
Additionally, weak investment flows into South Africa have “weighed on capital stock and labour productivity growth, while total factor productivity growth has been consistently” negative.
“Factors behind the structural growth weakness include labour and product market rigidities, poor educational achievement, high income inequality, and insufficient transport infrastructure – which has also constrained labour market attachment. Many of these would take years of consistent reform implementation to turn around,” explained Fitch.
South African business leaders also say that the country’s logistical and transport logjam, epitomised by rail and port constraints under Transnet, will take more than a year to effectively turnaround. This is despite what mining CEOs say has been notable improvements in Transnet’s rail and port operations.
Fitch Ratings earlier this month affirmed South Africa’s long-term foreign and local currency debt ratings at “BB-” and maintained the stable outlook.
It said in a statement on Friday that South Africa’s rating was constrained by low real gross domestic product (GDP) growth, a high level of poverty and inequality, a high government debt/GDP ratio and a rigid fiscal structure that hampers deficit reduction.
South Africa’s supply-side is expected to benefit from waning inflationary pressures, a rosy outlook on the back of growing confidence in economic policies under the Government of National Unity, and the kicking in of interest rate cuts by the South Africa Reserve Bank.
BUSINESS REPORT