Stretcing to capaciry
Constraints that could snap the growth cycle
Constraints that could snap the growth cycle
SOUTH AFRICA’S ECONOMY is expanding at such a rate that it’s bursting at the seams. That’s evident from the broad range of shortages and constraints that the economy faces. In addition, supply shocks – both globally and locally – are adding to the problem, creating headaches for economic policymakers.
The shortages that have emerged in the SA economy include major ones, such as electricity and skills. But there are others that have been less headline catching: cement,
steel, fuel, milk and carbon dioxide for cold drinks.
While not all of the shortages are the direct result of strong economic growth, most of them could constrain the economy’s growth potential. Those issues could stand in the way of reaching Government’s 6% economic growth target by 2010 and sustaining it at that level.
One of the constraints the economy faces is its transport infrastructure. That’s been brought into focus by, among others things, the explosive growth in motor vehicle sales, which has put strain on the country’s road network.
Over the past two years, around 1,3m new motor vehicles have been bought, with vehicle sales in Gauteng accounting
for nearly 40% of national sales. That’s placed some key roads – such as the N1 between Johannesburg and Pretoria – under increasing strain. A graph in the Budget Review showing the increase in traffic volumes between N1’s Buccleuch and Allandale interchanges at peak morning hours showed .an increase of around 900 vehicles/hour
between 1998 and 2006. In an effort to tackle that particular problem, Government has decided to build the R20bn Gautrain between Johannesburg and Pretoria. The Gautrain forms part of the public sector’s R416bn infrastructure spending programme. The programme, designed to alleviate serious bottle-
necks as well as add to the country’s social infrastructure, is one of the key aspects of Asgisa – the latter being SA’s economic growth programme, the Accelerated & Shared Growth Initiative of SA.
Trouble is, the massive infrastructure spending drive is difficult to implement without running into shortages. Cement and steel stand out in that regard. And Education Minister Naledi Pandor has complained that there isn’t enough cement to build the schools she plans to. Cement sales in SA are up 16% for the year to date compared with last year.
Naudé Klopper, executive director of the Association of Cementitious Material Producers of SA, says SA’s cement production capacity isn’t enough to meet current demand. “Nobody foresaw that the economy would boom quite the way it did,” says Klopper.
The cement industry has responded to the shortage in two ways: first, by importing and, second, by increasing capacity. Klopper says the first new increase in production capacity will come on line with about 700 000t at year-end 2007.
Between now and 2011, extra capacity to produce 6,6m t of cement will come on stream, made up mostly of brownfields expansions at existing faculties. More than R7bn will be invested in new capacity. As new production capacity comes on line, imports will be phased out. Last year SA imported 700 000t of cement.
Says Klopper: “Cement imports have cost an arm and a leg. But consumers haven’t had to pay for the additional cost. Producers have carried the burden.”
The most headline catching shortage that SA has experienced – and is likely to experience in the near future – is power. Electricity blackouts earlier this year caused a furore among businesspeople, with some analysts claiming hundreds of millions of rand were being lost in production. Finance Minister Trevor Manuel said at the time that was nonsense.
But Johannesburg business forum member Mike Schüssler says: “We told President Thabo Mbeki at the recent imbizo that we can’t see how the manufacturing sector can grow robustly in the near future if we’re to face five years of electricity shortages.”
Schüssler says some industry analysts even expect current periodic blackouts to last for
longer than five years.
Some analysts have blamed the stronger than expected economic growth rate for the power outages. Eskom has itself mentioned that as one factor among many. However, power expert Professor Anton Eberhard says Eskom’s forecasts for growth have been remarkably accurate. He says the real reason for the supply shortage is that Government prevented Eskom from building new generating plant between 2001 and 2004.
Whatever the reasons, the fact is that power outages represent a real – if difficult to quantify – constraint on SA’s near-term economic growth. The question is whether Eskom’s planned investment in new generation capacity will be enough to enable SA’s economy to grow at a sustained pace of 6% from 2010.
Eskom recently announced an increase in its capital expenditure plans to R150bn from a previous R97bn. The R150bn covers the period from 2007/2008 to 2011/2012. Eskom spokesman Fani Zulu says one of the reasons for the upward revision in Eskom’s spending was a higher gross domestic product growth assumption.
Says Zulu: “The increase in capital expenditure is driven substantially by a change in assumptions from 2,3% to 4% in electricity demand growth. The upward revision of the electricity demand growth is required to align to Government’s target of 6% economic growth between 2010 and 2014. Eskom’s decision to change its growth assumptions was reinforced by the GDP growth in fourth quarter 2006, which accelerated to 5,6% on a quarter-onquarter, seasonally adjusted and annualised basis.”
Another reason for the higher expenditure estimate is that costs have increased. Zulu says that one reason is that global costs are due to escalate on the back of an increase in demand worldwide for new electricity generating capacity.
Without massive investment in new power capacity, SA’s economy won’t be able to meet its growth targets. But one of the spin-offs of Eskom’s huge investment drive is that electricity prices are set to soar. This fiscal year the price of electricity is increasing by 5,9%.
However, Eskom feels that the planned increase of 6,2% for the 2008/2009 fiscal year is far too low. Zulu says Eskom is proposing an increase of the CPIX rate plus 13%. He says the reasons for that proposal are the increased capital expenditure programme and the sharp rise in the price of coal. The cost of coal for SA consumption has increased by 18,2% since October 2005.
Another shortage that’s received much attention is the skills shortage. To deal with that issue, Deputy President Phumzile MlamboNgcuka has spearheaded the establishment of the Joint Initiative for Priority Skills Acquisition – Jipsa. Labour, business and Government are represented on Jipsa.
Mlambo-Ngcuka recently gave a briefing on what Jipsa had achieved since its inception in March 2006. Its plans include increasing the budget for training engineering graduates. The stakeholders are also considering addressing the gap through other means, such as overseas scholarships and importing skills. There’s also a detailed plan to increase the number of artisans by 150%/year to produce 50 000 by 2010.
The Centre for Development & Enterprise (CDE), an economic thinktank, has conducted a lot of research on SA’s skills shortage. The CDE report says it’s a myth that the skills shortage is a shortterm emergency. “Developing and retaining our own human capital will be a long-term process.”
CDE director Ann Bernstein says: “In order to confront the full reality of our skills crisis, we have to face the fact that SA education and training is in deep trouble. Fixing that will take a generation. What nobody in the current discussion on the skills shortage wants to deal with is what do we do in the meantime?
“Every Government policy and strategy – black economic empowerment, local government, employment equity – assumes that there are sufficient trained people to fill the jobs and manage the complicated processes required.”
Bernstein says foreign imports are the quickest way to expand the skills base and develop SA’s own human capital.
Apart from these big, eye-catching shortages other, smaller, issues have also developed. For example, there’s the shortage of carbon dioxide to aerate cool drinks, which has already raised prices. There’s also a shortage of milk, due in part to cattle being slaughtered for meat amid drought conditions.
Such supply shocks contribute to inflation in a small way but they will combine with the oil price shock and other food prices to keep SA’s CPIX rate close to 6%.
Standard Bank economist Goolam Ballim says you have to distinguish between shortterm, cyclical shortages and structural issues, such as the skills shortage. “The short-term problems will have an effect, but that will be temporary. But the jury is still out on issues such as the skills shortage. That’s why I’m only cautiously optimistic that we’ll be able to achieve 6% growth on average.”
The SA economy faces shortages and constraints that will put pressure on inflation and the balance of payments. That situation may threaten the country’s ability to reach its 6% growth target on a sustained basis.
GROWTH POWERS AHEADSource: Reserve Bank
No one foresaw the boom.
BALANCE OF PAYMENTS UNDER PRESSURESource: Reserve Bank
Fani Zulu and Phumzile Mlambo-Ngcuka
Mlambo-Ngcuka says the number of artisans will be increased by 150%.
Expects five years of electricity shortages. Mike Schüssler