Drought set to shake SA’s economy

Johannesburg - At this stage, the three-year drought in Cape Town is expected to have a small drag on the national economy this year.

However, if the water crisis in the province doesn’t abate soon, the country’s financial situation will worsen.

John Ashbourne, Africa economist at Capital Economics, said that the biggest economic effect as a result of the Western Cape drought would be its impact on tourism and, to a lesser extent, agriculture.

“Tourism and related spending make up about 9% of South Africa’s gross domestic product (GDP), of which about a quarter is generated in the Western Cape. Were tourist spend in the province to halve, this would cut about 1.1% off headline national GDP.”

A 1.1% cut in national GDP would mean South Africa’s economic growth range would be, at best, slight and would, at worst, lead to a recession as forecasts for growth this year range from 0.9% to 2.3%.

“Images of Capetonians queuing for water at military-run collection centres would, of course, probably discourage potential visitors,” Ashbourne said.

“But a shutdown in April would come after the city’s peak season [two thirds of foreign tourists visit the area between October and March]. So even if arrivals in May fall precipitously, the impact on the sector would be limited. The effect would, in any event, depend on the duration of the water supply disruption, which could be quite short.”

The City of Cape Town is forecast to reach what it’s calling Day Zero on May 11, though this date fluctuates according to how much water residents are managing to save. On
Day Zero, the city will switch off the supply of municipal water to the majority of its roughly 4 million residents for at least 150 days.

Citizens and some commercial water users will be forced to queue at one of 200 water collection points for a daily allocation of 25 litres per person until water reserves are boosted.

With 6.3 million residents, the Western Cape accounts for 11.2% of South Africa’s total population.

“We think that the impact of this year’s drought on headline GDP growth will be relatively modest,” Ashbourne said.

“Agriculture in the Western Cape is primarily focused on fruit – notably grapes for wine production. This subsector will suffer and growers estimate that this year’s harvest will be the smallest in more than 10 years.”

Based on information drawn from a survey conducted by SA Wine Industry Information and Systems in the second week of last month, the harvest of grapes used to produce wine this year is expected to be much smaller than the estimated 1.4 million tons harvest last year, and will possibly be the smallest since 2005, when 1.16 million tons was harvested.

Vinpro, a wine industry body, expects that, as a result of the drop in the wine grape harvest, the net shortfall needed for export and local sales this year could be 90 million litres. As a result, the price of wine will most likely increase.

The drought in the province also affected last year’s wheat crop, which dropped to 586 800 tons – a decline of 47% compared with what was harvested in 2016.

Other major agricultural output in the Western Cape includes deciduous fruit, especially pears and apples.

Wandile Sihlobo, an economist at the Agricultural Business Chamber, said that the Western Cape was a key employer in primary agriculture, and it had a share of 20% of the country’s total agricultural labour force in the third quarter of last year.

About 21 000 jobs were lost in the Western Cape in the third quarter of last year, he said.

The province is the second-largest contributor to the agricultural economy in GDP, with a contribution of 22%.

At the end of last month, Moody’s Investors Service said the drought would have a negative effect on the City of Cape Town’s credit rating.

“The city’s municipal water revenue contribution of R3.9 billion equalled 10% of its operating income in 2017. The city will lose a portion of this revenue and will have increased operational costs from crisis management policies and programmes, and implementation of water supply projects. Two of Cape Town’s main industries – tourism and agriculture – are likely to decline, reducing employment, gross value added and tax income,” Moody’s said.

“Other effects include threats to public health from poor sanitation and, more generally, to social order, which is significant given Cape Town’s marked income inequality.

“The city has increased its capital budget to respond to the crisis, raising the 2018 total capital expenditure budget to R7 billion from R5.9 billion in 2017, largely to implement water projects,” the agency said.

“If the crisis persists, it remains to be seen how the city will cope with the unfolding crisis’ potentially wide-ranging consequences on the city’s finances and economy.”

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