Sunday Times online (7/2/2008 ) — 02/07/2008
ECONOMIC MELTDOWN IN SOUTH AFRICA

Tamlyn Stewart (additional reporting by Nkululeko Ncana and Zweli Mokgata)
 
'More and more obvious SA might be entering recession' as power crisis cuts deep
There is growing concern that South Africa's economy might slide into a recession as the country grapples with an electricity crisis, high interest rates and galloping inflation. Economists told The Times this week (after the release of the Business Confidence Index) that the rate of economic growth could dwindle to between 1 percent and 2 percent this year, if we are lucky, and might even dip into negative territory if the electricity crisis is not resolved. Economist Mike Schussler said: 'There's even a good chance that we will not grow. It is becoming more and more obvious that we might be entering a recession.' Schussler said the power cuts had 'knocked the stuffing' out of the manufacturing and mining sectors for January and part of February. He had revised his growth forecast down to 2.6 percent. 'But if this [the power crisis] continues, I will have to lower that as well,' he said.

Fantasy growth projections from purblind Minister Erwin
Resident economist at the South African Chamber of Commerce and Industry Richard Downing said business confidence in January was at its lowest since October 2003. The chamber's business confidence index slipped to 93.8, down from 94.8 in December, and way below the 101.5 level of January last year. 'If the situation continues as is, we might end up with 1 percent to 2 percent annual economic growth,' he said. He agreed with Schussler that there was a 'very real' risk of recession. Their comments contrast sharply with repeated assurances from Public Enterprises Minister Alec Erwin that South Africa can continue growing at more than 4 percent a year. The government is aiming for economic growth of between 4 percent and 5 percent a year until 2010, followed by 6 percent or more from 2010 to 2014. These growth rates would halve unemployment to 13 percent by 2014. But with major industries warning of job cuts, unemployment might, in fact, rise. The International Monetary Fund’s forecast of a 4.5 percent increase in South Africa's real GDP for 8 now seems out of reach.

Uncertainty over government economic policies, ANC leadership and energy crisis
Downing explained that if a business loses two hours a day of production time, 25 percent of total production time is lost. The down time cannot be recovered the next day when there are power cuts daily. The Chamber of Commerce and Industry's chief executive, Kwandi Kondlo, said if the short-term measures to address the energy crisis were not effective, the country could be heading for a 'serious slowdown'. The Business Confidence Index measures 13 sub-indices that affect business mood, including the exchange rate, inflation, interest rates, retail sales, export and import volumes and the All Share Index of the JSE. The All Share is about 4.9 percent down on the year. It has been pulled down by uncertainty over the economic policies of the ANC’s new leadership and the electricity crisis, said George Glynos, managing director of ETM (Econometrix Treasury Management).

Weakening rand/dollar exchange rate would promote inflation
Coupled with volatility on global financial markets, it is not a rosy picture. Adding to fears of slowing economic growth is the rand/dollar exchange rate. The weaker the rand, the worse the inflation outlook. And if the weakening local currency goes over the R8-to-the-dollar technical level, the Reserve Bank might need to raise interest rates again, said Glynos. High interest rates have already been blamed for constraining economic growth. Further increases would likely cripple small businesses already struggling to finance debt. 'But just because we are going through all these problems doesn't mean the economy is going to shrink. I don't know if I would go so far as to call 'Recession', but there will definitely be a downturn,' said Glynos.

Engineering, mining, manufacturing face lost customers and jobs
Michael MacDonald, the Steel and Engineering Industry Federation of SA’s Economic and Commercial Services head, told The Times he estimated the sector had lost between R150-million and R200-million a week due to the recent power cuts. The biggest producers have not yet quantified their losses. 'If the outages continue, people will be unable to fill export orders,' said MacDonald. 'They will lose customers - and once you have lost them, they are gone because you are not just exporting a product, you are exporting reliability of supply.' Whether the power cuts would lead to job losses in the sector depended on how quickly the energy crisis was resolved, he said.

The mining sector, core to the economy, was especially hard hit when Eskom unexpectedly cut power to the biggest mines, bringing production to a standstill. Mines are now operating on 80 percent of normal power. Gold Fields, one of the biggest mining houses, has warned that it could be forced to cut as many as 10,000 jobs as a result of the electricity cuts. Manufacturers have also been hard hit as most production lines demand energy levels that generators cannot sustain. A brake has been applied to the 10-year boom in car sales. McCarthy Motor Holdings forecasts an 8 percent drop in sales this year. The chief executive of Master Builders South Africa, Pierre Fourie, said that the building sector, particularly the residential sector, is under pressure from rising interest rates and is starting to show a slowdown in growth as power cuts affect material suppliers.