What's gone wrong in South Africa?

Government failure to increase capacity has left South Africa in the grip of power cuts and that means disaster for the country's economy, says Jody Clarke

What has happened to South Africa's power supply?

From 9 January to 3 February, South Africa had a series of rolling blackouts after several station breakdowns and a shortage of coal led to a shortfall in the supply of electricity. Mines and other businesses were forced to shut, as restaurant goers dined in candlelight and commuters negotiated their way home on roads with no working traffic lights. The impact on mine production sent the price of precious metals, particularly platinum, surging.

Why has this happened?

South African industry and consumers use around 36,000 megawatts a day of electricity, 9% below state-owned generator Eskom's capacity, says the Financial Times. However, to ensure stable output, electricity generation needs to be as much as 15% above demand. The government was warned a decade ago that, with economic growth at 5% a year, new capacity needed to be added to the electricity network. Yet it dithered and now South Africans will find themselves short of power until 2013 at the earliest, says Eskom. It has already negotiated a 10% cut in power usage with miners, and is planning similar deals with other sectors.

What impact has this had on the economy?

The government's plan to boost economic growth by 6% a year by 2010 is now in disarray, which throws some of its main goals into jeopardy. The target was an integral feature of its goal to halve poverty and unemployment, now running at 25%, by 2014. That now looks unlikely to be achieved, with the power cuts beginning to cost jobs. Gold miner Harmony has reportedly let 2,300 mineworkers go because of the power cuts, while Gold Fields has said that over 10,000 staff have been made redundant at four of its mines.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

JP Morgan Chase has cut its forecast for economic growth in 2008 to 3.7% from 4.4%, the weakest for five years. "The economic outlook for South Africa has soured, with the weakening external environment adding to its woes," says Moody's Economy.com.

The economy's fortunes are reflected in the fate of the rand, which is already down 12% this year against the US dollar. That's six times more than the next worst performer among the world's most widely-traded currencies, says Bloomberg, with UBS forecasting the worst year since 2001 for the rand. "The currency is the share price of a country," George Glynos, managing director of Johannesburg-based Econometrix Treasury Management, tells the newswire. "If anyone wants to know what foreigners are thinking about South Africa at the moment, they need look no further than the rand."

The lack of power could also prove a major embarrassment in 2010, when South Africa hosts the football World Cup. "Will people come [here] to see it if they know they will be going back to hotels and guest houses with no power? That means no hot meals, no clean laundry, no lights," says Michael Tatalias of the tourism association, reported in the Associated Press.

What is the government doing now?

Thabo Mbeki, the country's president, has already called the situation a "National Emergency", but many South Africans question the government's conviction and ability to fix the problem. Last week, minerals and energy minister Buyelwa Patience Sonjica suggested several solutions, one of which included "go to sleep earlier". In fact, after several years of high crime and alleged corruption in the upper echelons of the ruling ANC party, many South Africans regard the current debacle as the final straw. Other unpopular policies include plans announced this week to disband the highly effective Scorpions, an anti-crime unit that had investigated many ANC members on various corruption charges.

In addition, the way in which the HIV/AIDS crisis has been tackled with varying rates of enthusiasm has also galled many. The virus affects more than 18% of the population and is a major drag on resources in the health system, not to mention economic productivity. Yet most sufferers do not receive essential anti-viral drugs, leading to the deaths of 1,000 people a week.

What effect is all this having?

Those South Africans with the means and qualifications to emigrate are doing so as they become increasingly exasperated with the country's problems. Moving agencies report a 50% rise in enquiries from the same time last year. According to emigration lawyer Eden Joubert in the Pretoria News, "When we came back from the summer holidays, our phone lines and fax lines just started to get clogged up by people inquiring about going to Australia, New Zealand and Canada."

What does this mean for the rest of Africa?

Accounting for more than half of the electricity use in sub-Saharan Africa, South Africa is the engine room of the continent, with almost 20% of its exports headed for the rest of the continent. These vary from processed and unprocessed foods to finished products, such as the drills needed to mine raw materials including gold. But although neighbouring countries "might feel a cost effect on finished products because of short supply", they will remain largely unaffected, says Kevin Lings, an economist at Stanlib Bank in Johannesburg.

The "Southern Africa Development community is growing at 5%-6% a year, mainly because of the commodity-price boom and other factors like oil in Angola." The reality is that the region is less dependent on South Africa than it is on China, he says and thankfully, China shows no signs of taking its money elsewhere as yet.

For more on why the South African power failures are good news for precious metals investors, see: How to profit from South Africa's power cuts