Eskom, platinum strike behind growth downgrade
The World Bank lowered its forecast for South Africa’s economy to just two percent.
JOHANNESBURG - The World Bank says its decision to lower its 2014 growth forecast for South Africa was taken because of the platinum strike and the fact that Eskom cannot produce enough electricity.
The World Bank lowered South Africa's growth forecast for 2014 by a full 0.7 percent to just two percent, while it's 2015 forecast shrank by 0.4 points to three percent.
"Tight monetary policy, combined with labour strikes and weak electricity supply, will keep growth subdued in South Africa," the bank said in its report.
There are currently around 70,000 workers on the North West platinum belt who've been on strike for nearly five months, with no end in sight. The strike has cost the companies and workers alike billions in lost revenue and unpaid wages.
The strike has taken a hefty toll on the economy as a whole, with a first quarter contraction of 0.6 percent - the first negative movement in the GDP since the 2009 recession.
At the same time, Eskom has continued to issue warnings that the national power grid is "severely constrained" due to high demand and faulty systems.
"Eskom will utilise all necessary emergency resources at its disposal but should the demand not decrease, load-shedding will be implemented as a last resort to protect the national grid," Eskom said in a statement.
With these challenges in mind, Nedbank economist Isaac Matshego says the World Bank's decision is no surprise.
"When you look at the latest indicators, they're all pointing downwards. This simply means the economy is under pressure and output is not at an optimal level."
The news also comes just two days before credit rating agencies Fitch and Standard & Poor's announce their own decisions on the country's credit worthiness.
Analysts expect at least one downgrade given the anaemic growth and the threat of even more labour unrest.
"The downgrade won't be much of a surprise, but in the long term it should increase the price of capital and demand a higher a risk premium," Investec trader David Gracey said.
Essentially, a lower credit rating would mean South Africa has to pay higher interest on loans, putting further pressure on government to cut spending and risk greater stagnation in the economy.
*Additional reporting by Reuters.