South Africa: Reserve Bank - Damage Wreaked By State Capture Even Worse Than We Thought

The damage done by state capture is worse than previously understood, and its effects, coupled with load shedding, are bound to hit economic growth hard, according to the Reserve Bank Monetary Policy Review.

In a document outlining growth prospects for the country, the Pretoria-based institution painted a gloomy picture about the impact of these two factors bedevilling the South African economy, stating that growth remained "disappointingly weak". Subscribe to Fin24's newsletter here

"It has become clearer, however, that the legacy of state capture, of which load-shedding is one symptom, will constrain growth for a longer period," it said. "...[T]he damage done by state capture is worse than previously understood. Capital expenditure, especially by state-owned enterprises, has been less productive than anticipated."

Weakening Eskom

According to the Reserve Bank, the economy has less electricity than it had a decade ago, despite massive Eskom investments in new generating capacity. Faced with failing generating capacity, Eskom has in recent months re-introduced load shedding, which was implemented in stages ranging from stage 1 to stage 4.

Officials at the state-owned power generator and Minister of Public Enterprises Pravin Gordhan have assured the country that plans are in place to minimise or eliminate load shedding over the winter.

Gordhan said Eskom was working to ensure that unplanned outages or breakdowns are kept to less than 9500MW and that planned outages are within the range of 3000MW to 5000MW.

'Long-term lows'

However, the Reserve Bank indicated that should interruptions continue throughout 2019, the power cuts would "likely to reduce growth by 1.1 percentage points".

Eskom has been facing coal supply challenges and battling to ensure maintenance of its aging coal-fired power stations. This, the bank said, was "proving expensive, requiring higher administered prices and taxes".

"These adverse conditions seem to be blocking a stronger rebound in growth... .there is a risk that electricity shortages could cause even lower growth rates than currently projected," it added.

The central bank estimates that growth will likely reach 1.3% this year, before accelerating moderately to 1.8 in 2020 and 2.0% in 2021, in what the institution referred to as "long-term lows".

Current account deficit

Another key factor in the country's moribund economic growth is the large current account deficit, which was recorded at -3.6% of GDP in 2018.

"A current account deficit of this magnitude, however, is still relatively large, both by global standards and historical South African averages."

The country's current account deficit, as a share of GDP, will be the second largest among the G20 nations this year, after the UK, according to the bank.

Investment rates have also been low, "barely approaching the emerging markets averages in the best investment years".

Private sector investment has, additionally, been muted.

Source: Fin24

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