Johannesburg - Cape Town’s water crisis is likely to have far reaching consequences, not only on the local economy, but on the national GDP. The water crisis threatens further downgrades from ratings agencies, hampering much needed investment, economists have warned.
In a statement last week, Moody’s Investor Services indicated that the water crisis poses a credit risk to Cape Town’s debt rating, which is currently at the lowest level of investment grade – Baa3.
Moody’s added that the city was on review for a downgrade. The ratings agency also said that due to the marked income inequality in the City, Cape Town’s water crisis posed a possible threat to social order. It said the crisis would have wide-ranging consequences for the city finances and economy.
Rian Le Roux, Economic Strategist at Old Mutual Investment Group (OMIG) said that it was important to acknowledge the knock-on effect that the Western Cape water crisis is likely to have on South Africa’s overall growth in 2018.
The Western Cape accounts for approximately 13% of the national GDP. Le Roux explained that a 1% reduction in the Western Cape GDP equated to a 0.13% reduction in the national GDP.
“Therefore, if the rest of the economy grows by 1.5% in 2018 and the Western Cape grows by 0%, the national GDP will be up by only 1.3%.”
Last year Cape Town’s R3.9bn water revenue represented 10% of its total revenue. As water usage decreases so will the city revenues, Le Roux said.
On top of this revenue shortfall, the city will need to spend more on emergency services and infrastructure, placing additional financial strain on funds, he pointed out.
Moody’s also stated in its report that the city’s expenditure would increase due to higher operational costs associated with the crisis management and water-supply augmentation projects.
Le Roux explained that water demand was increasing at a higher rate than population growth, because as the income level of towns rise and demand for food and services increase. But in Cape Town the water is running out.
“Water availability is declining due to competing demands for agriculture and industry, and from deteriorating quality and climate change.”
Rest of the country's struggles
Further denting the economy was other regions' battle with water shortages as well. Le Roux said the water crisis was not exclusive to the Western Cape.
“The Eastern Cape is experiencing a severe water crisis too, and Gauteng currently has Level 1 water restrictions in place,” he said. “Rand Water has also recently placed a limit on its water supply in order to stay within permissible limits, having exceeded the allowable licence limit."
Risks and opportunities
Le Roux believed that especially companies that are highly dependent on water for the production of goods or delivery of services would suffer.
“In the Western Cape, which is a water-stressed region, the tourism and agricultural sectors are the two biggest consumers of water and are most likely to be hardest hit by the crisis,” he said.
But in-between the doom and gloom, opportunities did exist for new business. Jon Duncan, Head of Responsible Investment at Old Mutual Investment Group, said businesses could cash in, particularly for industrial firms able to take businesses and homes “off grid”.
Over the long term, he predicts that there will be emerging opportunities for unlisted infrastructure debt and equity in bulk waste water treatment and desalination plants.
Duncan said Public Private Partnerships could potentially offer a meaningful long-term solution for the City of Cape Town and other metros by bringing financial resources and technical skills which would otherwise be challenging to mobilise.
He agreed, however, that the current levels of revenue collection and pricing of water remain problematic.* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER