Water Is the New Eskom for South Africa's Economy, Nomura Says

  • Investment bank cuts 2016 growth forecast to 1.6% from 1.9%
  • Drought highlights `structural weaknesses' in water system

South Africa’s worst drought since 1992 has exposed structural problems in the country’s water supply, Nomura International Plc said, reducing its growth forecast for the continent’s second-biggest economy to 1.6 percent next year from 1.9 percent.

Upgrades to water infrastructure are running behind schedule and over budget, while the country hasn’t yet found the money needed to increase supply by the required 20 percent over the next 10 years, Peter Attard Montalto, an emerging-markets economist at Nomura, wrote in a note Tuesday.

South Africa is in the fourth consecutive year of drier-than-average weather, with 2015 the most severe since 1992. Water and Sanitation Minister Nomvula Mokonyane warned citizens Nov. 1 that supply reductions may be implemented in some areas should the level of reserves worsen. The lack of rainfall is partly due to El Nino, a global weather pattern that causes dry weather in sub-Saharan Africa.

"The water situation in South Africa has been a crisis waiting to happen for a long time -- but seemingly always in the future with a difficult-to-see trigger," Montalto said. "The El Nino event that hit South Africa in March -- and may have another six months at least to go -- has been the trigger that has exposed structural weaknesses on water security."

Montalto likened the water-security concerns with electricity shortages that resulted from decades of underinvestment by the government through its Eskom Holdings SOC Ltd. utility. In the first half of 2015, South Africans had to endure rationed power supply once almost every other day. The rolling blackouts were the worst since 2008, when Eskom shocked companies and households by declaring an national emergency and halted supply to mines, including those owned by Anglo American Plc and BHP Billiton Ltd., and paralyzed factories.

"It’s like Eskom 2008 -- a crisis waiting to happen and a random event that pushed the system over the edge," Montalto said.

Farmers in South Africa, the continent’s biggest corn producer, will reduce 2016 season plantings of the grain to the smallest since 2011 because of poor rains in the main growing regions, according to the Crop Estimates Committee. A drought in the previous season cut producers’ harvest to the smallest since 2007.

Lower corn production will knock 25 basis points off 2016 gross domestic product with another 4 basis-point reduction from imports, Montalto said.

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