Why markets should care about SA’s water security

By Janice Roberts
Peter Attard Montalto

Peter Attard Montalto

Minister of Water and Sanitation Nomvula Mokonyane recently briefed the media on the state of water security and the current drought in parts of the country.

The rainfall recorded by her department during the month of September until the middle of October 2015 showed that early spring had not yielded the anticipated rainfall, resulting in worsening drought conditions in some parts of SA.

This has led to water shortages in a number of public water supply schemes. So far, drought disaster has been declared in two of the country’s nine provinces.

Should markets be concerned about SA’s current weather conditions?  According to Nomura Analyst, Peter Attard Montalto, they should – because of the inflation risks and monetary policy implications, as well as the impact of water restrictions on output.

 “We lower our 2016 GDP growth forecast to 1.6% from 1.9%,” he said in a note.

Minister Mokonyane has said water supplies may have to be reduced in some areas, with the size of cuts dependent on consumers’ behavior, as well as future rains.

According to Attard Montalto, the water situation in South Africa has been “a crisis waiting to happen for a long time”.  The El Niño event that hit SA in March – and “may have another six months at least to go” – has been the trigger that has exposed structural weaknesses in water security.

“In this sense, it’s like Eskom 2008 – a crisis waiting to happen and a random event (wet coal) that pushed the system over the edge,” he wrote.

“As was the case with Eskom, SA is spending vast amounts of money on upgrading infrastructure; the problem is that this has started somewhat late and delays and cost overruns affect delivery.

“Tightening budget constraints and higher infrastructure build prices are also weighing. The Department for Water Affairs calculates that in the coming 10 years the country will need approximately 20% more water supply than it does now.”

According to the country’s Crop Estimates Committee, farmers will decrease 2016 season maize plantings to the smallest since 2011.

“The impact on SA’s growth will probably be relatively muted as agriculture is only around 2.5% of real GDP,” he added.But as imports will have to increase, there is a double hit on GDP (lower domestic production, higher imports).“Maize production is some 52% of crop production or 0.8% GDP, meaning a hit to GDP in the coming harvest through Q1 of around 0.25% off domestic production and around 0.04% from greater imports. All that adds to around 0.29pp off GDP for the full year in 2016, split between harvest quarters.”As we can see from the import size, the impact on the current account should be smaller. This is just for maize, as it is the largest crop share and the hardest hit. It will also affect inventories through stock run-down.”

A greater GDP impact should come through output disruptions for water-intensive industries such as mining and some forms of manufacturing.The consumption impact should be limited or possibly even to the upside, given an increase in contingency measure purchases (water storage, etc.).

“Overall, we think the wider impacts beyond agriculture are likely muted for now, given the short period so far of supply interruptions and the availability of mitigating solutions. However, here we account only for the temporary impacts- arguably, there is a small marginal, though potentially growing, drag on potential GDP from the structural issues behind the water crisis.”

Nomura has not formally added this impact to its GDP forecast before; “instead, we have continued to highlight the very high downside risk to our 1.9% forecast and factored in a ‘normal’ low harvest year.”

“We now take the step of adding the full drought impact in and reduce our forecast to 1.6% for 2016, keeping 2015 at 1.6% and 2017 at 2.4%. We continue to highlight exceptionally strong downside risks for next year from Eskom, labour and external demand.”




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