Tag Archives: carbon emissions

Is South Africa’s star waning?

What with seemingly endless energy shortages, simmering industrial unrest and innumerable social challenges, South Africa increasingly appears to be a country in trouble.

Although the continent’s second largest economy, and the one that still attracts the highest level of foreign direct investment, there are fears in some quarters that its star may be starting to wan – and will continue to do so unless swift action is taken.

For example, while South Africa may for years have boasted the largest GDP in Africa, it was knocked off its perch by Nigeria in April after a rebasing exercise, making the West African country more attractive to foreign investors overnight.

But the various gloomy perceptions about South Africa’s future were not helped last week by Moody’s decision to downgrade its credit rating to only two notches above junk status, continuing the steady fall from a 2009 high when the country boasted a top A3 rating.

Moody’s took the decision as a result of the developing nation’s deteriorating economic growth, an increasing budget and current account deficit and rising public debt levels (50% compared to 27% only five years ago).

These were caused, among other things, by rolling power outages, known locally as load shedding, apparently endless strikes in the all-important mining sector and generally slow domestic and global demand.

Although the move to cut South Africa’s investment grade status to Baa2 from Baa1 was not entirely unexpected following warnings in July, it has once again raised fears that a slide into junk status could be on the cards.

Similar concerns are also being raised over the country’s five largest banks – Standard Bank of SA, Absa, FirstRand, Nedbank and Investec – after Moody’s likewise downgraded their rating to Baa2 status on Tuesday.

The problem is that, because the banks have sizeable holdings of sovereign debt securities, the SA government’s weakening credit profile is having an impact on their own perceived creditworthiness too.

But any shift to junk status would cost the country dear by triggering an automatic sell-off of its bonds by foreign institutional investors and resulting in new buyers charging higher interest rates in order to counterbalance higher levels of investment risk.

In real terms, this means that it would cost South Africa, and its private sector, significantly more to service their debts. It would also become harder to borrow money in order to fund much-needed projects such as infrastructure development. Other potential repercussions include a likely nose-dive in the value of the rand and a rise in inflation.

Credit downgrades

To make this situation a reality though, two out of the three credit rating agencies would have to make the move. But Standard & Poor’s has already assigned South Africa a BBB- rating, the lowest grade before junk, while Fitch is expected to follow suit in December. This would mean that the country does not have much further to fall.

In South Africa’s favour though, Moody’s appears to have given its sovereign currency the benefit of the doubt. By shifting its outlook on the rating from negative to stable, the agency has made it clear that change is unlikely to occur any time soon.

On the downside, some analysts are predicting that if South Africa fails to sort out key issues such as weak tax receipts and sluggish exports fairly quickly, a downgrade could occur in as little as five years.

But David Knee, head of fixed income at financial services firm Prudential, believes that, when compared to other developing markets, South Africa is not in too bad a shape.

“It is clear that much hinges on economic growth over the medium-term”, he says, adding that South Africa “could indeed be downgraded by the ratings agencies should GDP growth remain weaker than expected for an extended period of time”.

But when “looking at the metrics of South Africa’s peers”, which include India and Brazil, Knee points out reassuringly that “the deterioration would likely have to be fairly significant to prompt ratings action”.

One area that the country really does need to sort out sooner rather than later if it is to prevent such deterioration though is its energy sector.

To this end, the government pledged to inject at least ZAR 20 billion (£1.1 billion) in equity to help plug state-owned utility Eskom’s funding gap at the close of last month – a move that saw both Standard & Poor’s and Moody’s hold off from downgrading its bonds to junk status, a seemingly a recurring theme here in South Africa at the moment.

Eskom needs the money not only to service the debt required to pay for completion of two new power stations vital to ease the country’s chronic power shortages, but also to maintain its existing ageing estate.

Evidence of what happens if such action is not taken came only a few weeks ago, in fact, when a coal silo at the Majuba power station in Mpumalanga collapsed, leading to yet another series of rolling power blackouts across the country.

Reducing exposure

South Africa’s iconic weekly documentary programme, Carte Blanche, attributed the collapse to non-existent maintenance following the introduction of incentivisation schemes that linked senior managers’ bonuses to keeping expenditure levels low.

But Majuba is not expected to function at maximum capacity for another six months, making scheduled load shedding an ever-present threat to both business and the economy.

As a result of all this, organisations such as South Africa’s second largest supermarket chain, Pick ‘n Pay, have been working hard to reduce their exposure by finding ways to cut electricity consumption.

As David North, the retailer’s group strategy and corporate affairs director, explains: “The objective of saving money motivates any business. South Africa is not immune to energy price hikes or electricity outages from load shedding. So when you get a combination of rapid increases in pricing and uneven supply, most companies will look at how they can reduce these challenges.”

To date, the retailer has managed to slash its power usage by 30% per square metre against its 2008 store baseline simply by addressing lighting and refrigeration efficiency issues. Such action has saved it a total of ZAR 508 million on electricity (£28.6 million) since the project began.

In fact, last year alone the company’s ZAR55 million (£3.1 million) investment in retrofitting lighting and refrigeration across 10% of its stores and two of its key distribution centres saved it a huge ZAR14.5 million (£814,949).

Measures taken included implementing less energy-intensive lighting systems, encouraging staff to turn lights off when no longer required as well as introducing motion sensors and key-switches to automatically put them out at night.

Moreover, all of the retailer’s stores now have online electricity metering, which means that managers can monitor energy usage via a dashboard. It alerts them should a refrigeration unit suddenly start consuming more electricity than normal, for example, so that they can take immediate action.

But because 85% of Pick n’ Pay’s buildings-related carbon emissions are generated by electricity consumption, the move has likewise helped it slash carbon emissions by 19.4%, beating the target it set itself in 2010 of a 15% reduction by 2015.

The firm’s efforts have, in fact, earned it an accolade from the Carbon Disclosure Project for being the top-performing retailer in Africa. Which just goes to show that every cloud truly does have a silver lining.

Energy will be Key to South Africa’s Future

One of the key things that economic and social development in sub-Saharan Africa hinges upon into the future apparently is the robustness of its energy sector.

According to a report just released by the International Energy Agency (IEA), the current state of the industry and a lack of access to electricity by vast swathes of the population are, unsurprisingly, putting a break on economic growth.

But as the IEA’s chief economist Faith Birol explains: “The pay-off [of getting it right] can be huge, with each additional dollar invested in the power sector boosting the overall economy by $15.”

Unfortunately for South Africa though, its energy situation appears to be in a bit of a mess.

For instance, despite the damage to the economy caused by rolling blackouts across the country earlier this year, the National Energy Regulator has caused outrage by approving a tariff increase of an average 13% until 31 March 2106, up from a previously agreed 8%.

The figure is more than twice this year’s average inflation rate of 6.2% and fears are that it will put a damper on an already struggling economy that only missed going into recession last quarter by the skin of its teeth.

But the move, which is intended to help state-owned utility, Eskom, cover ZAR7.8 billion (£433.6 million) in costs that it failed to budget for in the three years to 2013, has also been met by dire predictions that it is simply a taste of more to come.

The issue is that the company, which supplies 95% of the country’s power, faces a further funding shortfall of ZAR225 billion for the five years to March 2018.

As a result, it is currently unable to come up with enough money to service the debt required to pay for the completion of two new, and very necessary, power stations in order to tackle the country’s chronic power shortages.

Last month, the government announced it would put together a financial rescue package, the details of which are due to be announced on 22 October. Ratings agency Standard & Poor’s will then decide whether Eskom’s debt situation warrants its bonds being downgraded to junk status.

Economic impact

To have any real chance of plugging its funding gap though, economists have estimated that Eskom will need to increase its tariffs by at least another 13% per year for the next five years.

But the worry is that this situation will make South Africa increasingly uncompetitive on world markets. It certainly won’t help inflation or manufacturers already hit by rising labour costs and low demand for their products.

Or consumers for that matter, who are struggling with rising food and fuel costs, high levels of personal debt and unemployment rates of around 25%.

So the situation is not good by anyone’s standards – and doesn’t get any better for reading the US Central Intelligence Agency’s World Factbook either, which would appear to back up the IEA’s report.

The Factbook indicates that South Africa’s economy will be unable to grow at more than 3% until Eskom’s new power stations come online, one by the end of this year and the other in 2017, which is obviously a while yet.

The problem is that to make a dent in poverty and unemployment, which both contribute to societal stability, it is widely accepted that GDP needs to increase at twice that rate.

Another contentious issue, meanwhile, is how the country’s electricity is to be generated in the first place.

South Africa currently produces 77% of its energy using coal. It is, in fact, one of the seven largest coal-producing and one of the top five coal-exporting nations in the world. This means that the mineral, being its third largest source of foreign exchange capital behind platinum and gold, is vital to the country’s economy.

But after getting a bad name for itself as the continent’s worst polluter and as one of the world’s top 20 carbon emitters, it pledged to take action, submitting reduction targets to the Copenhagen Accord in January 2010.

South Africa has now promised to reduce national carbon emissions to 34% below 1994 levels by 2020 and 42% by 2025 – should it get the necessary financial, technological and capacity-building support from the developed world, that is.

And so far it seems to be trying to honour that vow. Since December 2011, the country has signed off 64 renewable energy projects, including wind and solar, which equate to more than ZAR100 billion (£5.5 billion) of both domestic and foreign investment.

Energy mix

So while renewable energy accounted for less than 1% of the country’s energy mix in 2012, it is expected to hit a much more healthy 12% by 2020, jumping to 17% by 2030.

According to research released last October by analysts Frost & Sullivan, this scenario would place it among the top 15 countries in the world in terms of renewable deployments.

But it seems that President Jacob Zuma also has a controversial personal interest in nuclear. After promising to purchase a fleet of power stations in his opening address to Parliament in June, following similar statements in his State of the Nation speech in February, he made a mysterious visit to see President Vladimir Putin in Moscow last month.

Immediately afterwards, Russian energy company, Rosatom, announced that it had signed a $50 billion deal with Pretoria to build eight nuclear reactors that would generate 9.6Gw of power by 2030.

The pact was based on a “build now, pay later” vendor-financed arrangement that would see Eskom buying back energy at high predetermined rates for up to 20 years.

But the move led to an outcry, with concerns being voiced over everything from corrupt and un-transparent procurement processes to the sheer cost of the proposals, which some feared could cripple the country as tariffs skyrocketed.

The Department of Energy appeared to backtrack very quickly though, countering that the Russian compact was simply a preliminary agreement on nuclear cooperation as part of a wider tender process that would also involve other countries over the coming months.

The government has since confirmed that Eskom will not act as the owner and operator of the new power stations. This process will instead be led by the Cabinet’s energy security subcommittee, which is chaired by no less than Zuma himself – a man said to regard a nuclear power project as part of his legacy.

A businessman with historically close ties to Zuma has also intimated to South Africa’s Mail & Guardian newspaper that the decision to award the contract to Russia has already been taken, essentially making it a done deal.

But no matter how murky such a set-up may seem, what is clear is that how these various scenarios play out over the next few months will be crucial in terms of the impact on the health of South Africa’s economy for years to come.