The risks to SA’s economic prospects have sharpened, with the floods in KwaZulu-Natal creating a huge challenge to rebuild logistics infrastructure relied on for imports and exports.
Raymond Parsons, a professor at the North West University School of Business and Governance, said this week that while the net economic effect of the floods remains to be calculated, preliminary estimates suggest that in a worst-case scenario it could trim SA’s GDP in 2022 by 0.1%-0.2%.
“The main negative effect will be reflected in the second quarter ... but subsequent quarters of the year will obviously be influenced by the pace of economic recovery and reconstruction in KwaZulu-Natal.”
Parsons said SA's economy had suffered a serious “double whammy” from the floods and Eskom’s extensive load-shedding.
Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said natural disasters tend to have a short-term effect on GDP, with economic activity slowed immediately but bouncing back as activity rebounds and reconstruction starts.
This rebound was evident after the unrest and looting in KwaZulu-Natal in July last year.
Recession looms for SA, not just for a quarter but the entire year
— Andrew Bahlmann, CEO of Deal Leaders International
“For national GDP it depends on how quickly the cleanup and rebuild can happen, and in particular how quickly all the national logistics corridors — rail, road and port — are up and running again and backlogs are cleared. Looking at the national perspective, the effect should be short-lived and limited,” he said.
However, the effect was huge locally, said Odendaal, as people had lost homes and many small and micro businesses might not be rebuilt.
“I’m particularly worried that this is the second crisis to hit KwaZulu-Natal in a year and it might deal a permanent blow to business confidence in the region. As with the unrest last year, the government's response will be crucial in restoring business confidence.”
Andrew Bahlmann, CEO of corporate advisory firm Deal Leaders International, said the effects on the economy will be more severe than the 1.5% hit to GDP from the July 2021 riots.
“Recession looms for SA, not just for a quarter but the entire year. It’s too early to tally the economic cost of the disaster but it appears to far outstrip the riot damage of last year.”
He said recession was not an unrealistic prediction, taking into account that SA’s GDP is back to where it was in 2016 — so effectively it has been a six-year recession.
“The July riots knocked 1.5% off the quarter’s GDP, and the effect of the floods looks much more severe, as we are talking of outright destruction and not just looted goods, which in one form or another still remain part of the economy.”
Bahlmann added that in the short term, business performance is being affected severely. “Customers not able to receive their shipments from SA may look elsewhere for supply — and stay elsewhere.”
KwaZulu-Natal is pivotal to SA's supply chain and logistics, and the closure of container terminals in Durban illustrates that the effect is felt far beyond the province, he said.
This week the IMF said SA’s economy would grow 1.9% in 2022 and 1.4% the next year, unchanged from its forecast in January. But the forecast, which was part of the IMF's World Economic Outlook, would not have taken into account the floods.
Agri SA this week said backlogs that had developed at the Durban port were particularly serious for the export of perishable agricultural products that needed to be properly stored and transported.
Andrea Campher, Agri SA’s head of disaster risk management, said the port is strategic for many agricultural exports, particularly fruit.
“For example, there is already early-season citrus in the market, but this is also now the harvest time for a number of commodities, making access to a functional port crucial for those producers and the sector at large.”
Campher said one of the big challenges for exports comes from the conditions set out in trade agreements.
“Produce must meet specific requirements for quality as set out in these agreements. If agricultural produce meant for export is delayed it can affect the quality of that produce, which can attract penalties or a complete loss of income.”
South African Sugar Association spokesperson Cedric Mboyisa said parts of the sugar industry suffered severe disruption. The Gledhow Sugar mill at KwaDukuza was flooded by the Umvoti River, and it would be about two weeks before operations could resume.
It is expected that the province's nine mills will be able to resume operations in the short term. But Thomas Funke, CEO of SA cane growers, said extensive crop and root damage to sugar cane farms would require total replanting of fields. Along with damage to farm buildings, equipment and roads, the losses farmers face so far amount to R222.9m.
“This catastrophic damage comes just as many cane growers had started recovering from the riots and arson attacks that took place in July last year, which saw 554,000t of cane being burnt and R84m in losses. This latest tragedy could be the final death knell for hundreds of cane growers and the rural livelihoods they support. In particular, small-scale growers are most at risk of not recovering from losses of this magnitude.”
Credit ratings agencies must be prepared to see any fiscal deviation as driven by a natural disaster and not by a deliberate flouting of sound fiscal principles
— Prof Raymond Parsons
Some business were starting to pick up the pieces. Sappi said its employees had returned to work and Tugela and Stanger were operational, while the Saiccor mill was being started in phases. There was no material damage to its plants.
Its immediate focus was to restore logistics for the transport of raw materials and finished goods, and alternative arrangements had been made.
Lost production was estimated at 23,000t of mainly dissolving pulp, while about 45,000t of inventory was damaged in the warehouses.
Toyota SA said it had suffered extensive damage to its plant at Prospecton, south of Durban, and activities had been suspended while an assessment and cleanup takes place.
The National Treasury said on Friday it was too early to tell what the cost implications of repairing roads, businesses and other infrastructure would be.
“What can be reprioritised will be done within the existing framework. Once we have a sense of the full costs, will we have a sense of the effect on the spending ceiling and government’s planned priorities,” it said.
Parsons said: “The recent budget showed there is fiscal space, partly due to the large windfall tax revenues from higher commodity prices, particularly for mining.
“Sars is also generally showing more efficient tax collection. And credit ratings agencies must be prepared to see any fiscal deviation as driven by a natural disaster and not by a deliberate flouting of sound fiscal principles.
“In any event, what is nevertheless still essential is that SA’s changed fiscal metrics must be smartly managed and remain credible.”
Additional reporting by Nick Wilson
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