Low energy growth to hold back higher GDP, analysts warn

While President Jacob Zuma on Friday celebrated Eskom’s Medupi power station moving a step closer to contributing its first electricity to the national grid next year, analysts have warned that economic growth of 6% is a far-off dream if power capacity or efficiencies are not expanded faster. Experts say economic growth of 6% will not be achieved if South Africa’s power capacity sor efficiencies are not expanded faster.

South Africa's gross domestic product (GDP) growth tends to match growth in extra power capacity, and even with the new Medupi and Kusile plants coming on stream up to 2020, a long, slow growth path of less than 3% lies ahead unless more energy is found. Mr Zuma initiated the final phase of a pressure test on the boiler of the first unit of Medupi on Friday. It will be the first new power station South Africa has built in more than two decades. Once it is complete, at a cost of R91bn, it will be the world's fourth-largest coal-fired power station, with a total installed capacity of 4800MW.

But Ian Liddle, chief investment officer at Allan Gray, one of the country's biggest asset managers, says even with two new stations coming on stream, power supply will only grow 2,7% to 2020. His research indicates a strong, historic correlation between GDP growth and power capacity development."It seems hard to believe how real GDP can grow at more than 3%, as we are fully utilising capacity," he says. Eskom's available capacity on Thursday dropped to 36847MW from this year's peak of 37951MW on June 5, but up from only 34884MW on May 21. It remains highly constrained, especially while South Africa endures a cold snap. Colen Garrow, chief economist at Meganomics, says South Africa "started leaning against the winds of contagion long before it became fashionable to rely on infrastructure". But the problem is that the country needs 6% growth to dent 25% unemployment. Mr Garrow's forecast is at 3,5% at the upper end over three years. "We are still building, while a lack of skills is holding us back and commodities are holding us back," he says. He adds: "The poor global financial environment blowing our way also makes it hugely difficult to grow. We can only grow GDP as much as global markets allow. So we muddle along. It is disappointing. There are constraints, and infrastructure is one." While big electricity and water projects may be on the cards, recent statistics show growth levels are not very exciting. According to first-quarter GDP data, the electricity and gas sector had no growth whatsoever, whereas in the quarter before it grew 0,7% and in the one prior to that 1,1% — three consecutive quarters of poor growth. However, Mr Garrow points out that infrastructure spending in the trillions, and its knock-on impact on GDP numbers, "is huge". "We are starting to tie things up," he says. "Things are happening, and if not quick enough, at least we're not going in reverse." However, he says, "if we don't get electricity and some key utilities moving, we can't deliver as an economy and get the efficiencies, so it's really holding us back in many ways".

Achieving 6% growth will remain a challenge until all the plans fall into place, but long lead times of projects continue to worry analysts and government planners. For example, the Gautrain commuter railway sytem was commissioned in 2000 and took 12 years to complete. While nuclear and green technologies remain high on the agenda, the nuclear plant at Koeberg took 14 years to get going. South Africa is, at least, past the planning stages on big projects such as Medupi and the Gautrain, as they are now operational, while a major freeway improvement plan is coming into play. Mr Garrow says South Africans must also consider these to be wins. "They are not knee-jerk response to global conditions," he said. "That is a blessing."

This article was written by Evan Pickworth first published on www.Businessday.co.za.

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