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Joining Alec and Gugu from the CNBC Cape Town studios is Bank of America, Merrill Lynch economist Matt Sharratt. In this interview, Matt identifies the main speculative risks to the growth of the South African economy as being labour strikes, wage negotiations and the ever-present load shedding debacle. Alec realistically puts the numbers that we can consider the power outages to be costing the country, beyond simple base point percentage shifts. The cost in rands is a little bit frightening. – CH
GUGULETHU MFUPHI: Bank of America, Merrill Lynch, has released a report titled ‘South Africa 2015 and 2016 Macro Outlook – A Struggle for Growth’. In it, the bank says it expects South Africa’s GDP growth to improve to two-point-three percent in 2015, and then two-and-a-half percent in 2016. Joining us now from our Cape Town studios is Matt Sharratt, Economist at Bank of America, Merrill Lynch South Africa. Good to have you with us Matt. Just reviewing that title as well as the numbers that we’ve quoted there, regarding growth expectations, it does seem as though South Africa doesn’t have a positive outlook, going forward.
MATT SHARRATT: No, there are definitely lots of challenges, as you rightly point out. The improvement to two-point-three percent growth we expect this year is subject to a lot of risks quite frankly and interestingly enough the risks are on both sides. I mean lower oil prices could be a significant boost to output but domestically, the electricity load shedding is one of the most significant risks, but this improvement that we are talking about is really just what we expect will be somewhat less distortion, coming through from labour strikes that we saw last year – not that that is without risk this year as well. This improvement that we think we’ll get to two-point-three percent is really based on just some sort of normalisation, but to actually what we think is a very emulative pace of growth, and we would put the trend rate of growth around two-and-a-half percent.
Even achieving that pace in 2016, as we believe, again I think is simply not good enough for South Africa, given its rate of unemployment.
ALEC HOGG: Matt, we know South Africa is a very open economy and we also know that parts of the world that have been sluggish are starting to pick up. Particularly where your parent company is based, in the United States, annualised growth five percent in the third quarter of last year. How much of that uplift and the impact that will have on the global economy, is worked into your numbers?
MATT SHARRATT: We do work the improvement and global growth into our numbers. Like you say, we are expecting a modest recovery in global growth. A lot of that is driven by the improvement in the US As we stand at the moment, we do actually see downside risks outside of the U.S., but still we’re looking for a growth GDP figure, in terms of growth, round about 3.7% percent this year. That will help support the South African growth trajectory but in terms of important trade partners, such as the Eurozone, also China, in terms of our commodity exports. Growth there is relatively subdued in terms of their own historical experiences, and I think that will not be incredibly supportive for South African economy, but relative to, as you’re pointing out, there is some improvement in the global growth.
What worries me the most is, domestically that we do face significant risks, in terms of the load shedding that’s going to potentially be a real head-wind to growth and we still have to look through potential wage negotiations in the public sector and indeed the gold sector by the middle of this year. These could lead to labour disruptions.
ALEC HOGG: Yes, gold, there’s lots of concern there. Load shedding is the other big issue. If we had normal power in South Africa, if there was no threat from Eskom, what would your growth number look like?
MATT SHARRATT: It would be a little bit higher. I think you rightly point out that if the Government was able to follow through on its infrastructural plans and, in particular, what’s been planned for Eskom, I think we could add, relative to our trend growth rate assumption, at the moment, about two-and-a-half percent; I think we could add, sort of 30 to 40 base points on. We could be growing just slightly below or around three percent, but certainly, in terms of the electricity constraints that we’ve had over the couple of years, I think two-and-a-half percent is the best we can hope for, and certainly if we actually go into more extreme load shedding – more sustained load shedding – it is not inconceivable that we could be talking about one handles GDP growth this year.
ALEC HOGG: All right, well now with your mathematical brain, and tell us what those 30 to 40 basis points are worth. Take that as a percentage of the economy or of the growth, how much is Eskom costing South Africa, in economic growth terms (in Rand terms) this year?
MATT SHARRATT: I think it’s a very difficult number to come up with, in terms of trying to establish an absolute number for how businesses and consumers will be hit through the course of some undisclosed load shedding events. But I do believe that if we had one sustained quarter of load shedding, similar to what we saw back in the late 2007, early 2008. That could subtract one percentage point of GDP and, as I say relatively to a slightly above two percent number for this year, that we’re pencilling in, we could be closer to a low one percent figure, as a risk.
ALEC HOGG: Come on Matt. Let’s get a bit specific here. The GDP for South Africa is what, about $350bn.
MATT SHARRATT: That’s correct, about $350bn.
ALEC HOGG: Okay, half a percent of $350bn is $17.5bn or let’s calls it $17bn – that’s R170bn. That’s what you’re telling us Eskom cost us this year or is likely to cost us through its load shedding. Those are huge numbers. I wonder if anybody in Government has actually had that penny drop.
MATT SHARRATT: I think Government is very aware of the problem and, as you know, the developments around the Medupi and Kusile power stations are very well advanced. There’s been a long, sort of story about why these things have been so extensively delayed, but these things are in the pipeline, and they will help solve the energy crisis, when they come to fruition. It does look like the much talked about first 600 megawatt unit, from Medupi, which if we take at face value that’s only coming in the middle of this year. That’s unlikely to be a big game changer, simply because over the last six to 12 months we’ve actually seen the data published by Eskom that unplanned maintenance has started to drift up. Of the latest numbers, that I’ve seen unplanned maintenance is around about five-point-eight gigawatts. It’s roughly 800 megawatts higher than a year or so ago, on the numbers that I’ve seen.
That means that the first year of Medupi is not going to be the big game changer. It will require subsequent units, which may take up to six months in addition to implement, so we’re really talking about load shedding constraints all the way into the middle of next year. I do think the Government is aware of it but, at this stage, aside from the actual implementation of these energy power plants, there’s not that much that can be done, in the near term, apart from load shedding to protect the grid and encourage users to economise on energy usage.
ALEC HOGG: He’s a man with a very exciting and sunny outlook, isn’t he?
GUGULETHU MFUPHI: Alec…
ALEC HOGG: Mr. Matt Sharratt. My goodness Matt, I wish you could give us some good news on all of that but clearly, Government’s decision a few years ago – and now they’ve admitted it – that they didn’t let Eskom go ahead with the power stations, is costing us R170bn in loss growth per annum.
GUGULETHU MFUPHI: Do you know…? What makes me wonder about this is…
ALEC HOGG: Those numbers are scary.
GUGULETHU MFUPHI: It is, no doubt, the National Development Plan. If they have estimates of five percent growth for South Africa to achieve their objectives, at the rate we’re at, at the moment, 2030 might take a couple of years longer.
ALEC HOGG: Unintended consequences of decisions that are taken and not followed through on because they don’t understand, they didn’t understand at the time. They said ‘let’s postpone. Kick Eskom into touch. They don’t need the money’. My goodness, are we paying for that stupidity that was put through at that stage. Anyway, Matt Sharratt can’t be a happy guy at the moment because he is a practitioner of, what we call, ‘a dismal science’. He’s an Economist at Bank of America, Merrill Lynch South Africa.
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