Capital spending boosts economy

Pylons in the Free State province.
Electricity infrastructure upgrade makes up
the bulk of planned capital expenditure for
the first half of 2008. (Image:
Chris Kirchhoff, MediaClub South Africa.
For more photos, visit the image library.)

Janine Erasmus

Despite the global financial downturn, record infrastructure investment in 2008 has helped boost South Africa’s economy, offsetting lower consumer spending due to high interest rates.

The first half of the year was a strong period for planned fixed investment, according to the Nedbank capital expenditure report, released in August 2008. Nedbank is one of South Africa’s big four banks.

The report revealed that a total of R336-billion ($43.2-billion) was pumped into new projects in the first six months of 2008, compared with R194-billion ($24.9-billion) for the whole of 2007. Of this, R243-billion ($31.3-billion) has been allocated to the upgrade of state-owned national power supplier Eskom, which experienced severe difficulties in meeting the demand for electricity in late 2007 and early 2008.

Despite the energy crisis, fixed investment remains at positive levels. Nedbank forecasts economic growth of 3.5% in 2008 and 2.8% in 2009.

Other major areas of investment are the upgrade of South Africa’s rail system and expansion of its ports. The 2010 Fifa World Cup is an important incentive for development, with government ploughing billions into public transport, stadiums, and other facilities ahead of the event.

Private sector investment is also healthy, with a planned 64 projects worth R72-billion ($9.3-billion) compared to R105-billion ($13.5-billion) for 2007.

Nedbank’s chief economist Dennis Dykes said that while most of the expenditure in 2004 came from the public sector, 2005, 2006 and 2007 were dominated by spending in the private sector. “The first half of 2008 has been more public sector dominated simply because of the big Eskom effect coming through – but having said that there are a number of large private sector projects.”

Nedbank economists expect this cash injection to boost growth generally and alleviate the effect of decreased consumer demand, supporting the economy and ensuring that growth does not reverse into recession. They say that the next two years in particular will show strong growth in fixed investment activity.

“The fact that we have this infrastructure spending, that we have this private sector spending is going to keep us out of recession,” said economist Nicky Weimar of Nedbank. She said infrastructure spending will improve export capacity, adding impetus to economic growth and job creation.

Not as tough as expected

Dykes expressed surprise that the rate of spending on capital projects remains firm in spite of the difficult economic climate. Speaking to Summit TV, he said expectations had leaned towards a frugal first half of the year.

“Obviously we had the electricity crisis, we had interest rates going up again, we had the global economy weakening off, we had political and policy uncertainty,” said Dykes. “Those were all issues that we thought might lead to some delays in projects that had already been announced, and possibly fewer projects announced in the period reviewed that were listed in the first half of the year – but that didn’t seem to be the case.”

Growth in other sectors

Dykes said that the Nedbank report focused on projects over R20-million ($2.6-million). Although most of the expenditure comes from Eskom, there are also some large projects in the pipeline for the oil refining industry. The manufacturing industry expects strong growth with new projects of R25-billion ($3.2-billion) compared with R15-billion ($1.9-billion) last year.

The finance and real estate sectors also show a positive trend and are due for a boost of R38-billion ($4.9-billion) in investments, more than double the amount for 2007. Dykes attributes this mainly to a growth in retail facilities and housing estates, especially low cost housing projects, which economists view as an encouraging sign.

A series of interest rate hikes and slower consumer spending did not affect growth in real estate, even though the repo rate has risen by 500 basis points to 12% since June 2006.

Dykes warns that the deceleration in retail sales could affect the economy, as people have less disposable income, and more of what they do have is going towards servicing credit debt. Retail sales have fallen for four months in a row up to August 2008 and new vehicle sales have shown a steady decline for more than a year.

Mining industry under pressure

The mining industry was not as robust as other sectors, with investment plans of R6.5-billion ($840-million) for the first six months of 2008 compared to R49.7-billion ($6.4-billion) for the corresponding period in 2007. Dykes attributes this to a number of factors. “We have seen a lift off in mining investment spending over the last couple of years, but not to the extent that you would have anticipated, given that we are in a global commodities boom. We do expect this situation to continue.

“So there it has been a case of transport infrastructure and regulatory constraints – obviously the confusion over the change from old order to new order mining rights, and the delays that actually entailed, and companies simply saying while that’s getting sorted out in South Africa we will put in exploration elsewhere and actually develop other resources.”

The only major project not included in Nedbank’s report is the planned Rio Tinto aluminium smelter at Coega in the Eastern Cape, which is on hold because of reservations regarding Eskom’s ability to provide sufficient power for the plant.

But Rio Tinto CEO Tom Albanese said in late August that the company continued to engage in discussions with Eskom and the South African government on the project, as it is still believed to be viable.

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