Electricity constraints a major concern for Sarb

SA Reserve Bank deputy governor Francois Groepe.
SA Reserve Bank deputy governor Francois Groepe.

Cape Town – While global economic factors impacted South Africa’s weak growth prognosis, there were binding constraints coming from the electricity supply uncertainties, said Reserve Bank (Sarb) deputy governor Francois Groepe.

On Tuesday, Stats SA said the country’s GDP increased by 1.3% year-on-year (y/y) in the first quarter of 2015, compared to the 4.1% y/y GDP increase in the fourth quarter of 2014.

"This [GDP rate] is against the backdrop of the sluggish growth rate of 1.5% for 2014 and which is well below the bank’s estimate of potential output of between 2% and 2.5%," he said.

Sarb governor Lesetja Kganyago said on May 22 that the Monetary Policy Committee voted 4:2 in favour of keeping the benchmark repo rate at 5.75%, but warned the deteriorating inflation outlook meant the stance could not be "maintained indefinitely".

Load shedding hampers growth

Speaking at the Actuarial Society of South Africa’s Investment Seminar in Cape Town on Wednesday, Groepe said Sarb’s estimate of growth tries to incorporate some element of the impact of load shedding on output.

Load shedding could hamper new investment coming into South Africa, but it also has an impact on existing capacity and therefore on current output, he said.

“We estimate this latter factor to be in the order of magnitude of around 0.5 percentage points of GDP.

“Load shedding appears to have contributed to a general low level of business confidence, as evident in the various confidence indices, but also evident in the very low growth in private sector gross fixed capital formation."

“In 2014, gross fixed capital formation contracted by 0.4%, driven mainly by the 3.4% contraction in investment by the private sector, which accounts for just under two thirds of capital formation."

He said that supply side constraints and low confidence would likely constrain stronger growth.

“It is worth noting that the more favourable fixed investment outcomes observed in 2013 were mainly related to renewable energy projects,” he said.

A further issue relates to electricity prices, said Groepe.

“There is some uncertainty following the application to Nersa for a 25% increase in electricity tariffs,” he said.

“The Bank’s model previously incorporated an increase of around 13%, effective from 1 July 2015, but should a higher increase be granted, we will see further upside pressure on inflation.”

Global impact on growth in SA

Groepe said the global environment facing South Africa remains challenging and fraught with a high degree of uncertainty.

“Developments in the US, in particular, continue to have spill-over effects on emerging markets in general and South Africa in particular,” he said.

“While it is clear that monetary policy normalisation will (and should) take place, the timing of the initial ‘lift off’ is still uncertain, and dependent on domestic developments in the US, not least in the labour market.

“The spill overs on to South Africa from these developments are significant.

“The US impact is through the exchange rate and long term bond yields, which are highly correlated with those in the UK.

“The eurozone is an important destination for South Africa’s manufactured exports, so a slow recovery is bad for the manufacturing sector, while the (until recently) weaker euro means that the competitive advantage from a weaker rand is undermined.

“Although the African continent, which has been growing quite robustly, has emerged as one of the main destinations of South Africa’s manufactured exports, there are downside risks to the continent’s growth prospects given the decline in oil and other commodity prices.

“The slowdown in China has had a marked impact on global commodity prices, resulting in a deterioration of South Africa’s terms of trade, which was only reversed to some extent with the collapse of international oil prices since late last year, but even this windfall has reversed somewhat.

“So all in all we are indeed facing a challenging international environment.”

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