Why markets should care about South Africa’s water crisis

The water crisis confronting South Africa is the country’s new Eskom‚ according to Nomura global markets research analyst Peter Attard Montalto.

He said the water situation in South Africa has been a crisis waiting to happen for a long time – but seemingly always in the future with a difficult-to-see trigger.

“The El Niño event that hit South Africa in March and may have another six months at least to go has been the trigger that has exposed structural weaknesses on water security. In this sense‚ it’s like Eskom 2008 — a crisis waiting to happen and a random event (wet coal) that pushed the system over the edge‚” Attard Montalto said in a research document.

Though parallels are clear‚ the water crisis is however more complex‚ he said.

“As with Eskom‚ the water crisis is not so much about a system that is at every moment in crisis or deficit but about a system that has structural defects that are exposed by weather and ‘unlucky’ events such as technical problems. At present‚ that has meant a lack of rainfall and record-low levels in dams‚ combined with high temperatures in some areas‚” he pointed out.

He also pointed out in an aside that it is worth noting that South Africa actually has some of the highest piped water quality in the world where the system is working.

He added that the serious drought developing in South Africa‚ especially in the north and east highlights much deeper structural issues on water supply.

“Food prices are a key fear factor for the SARB (SA Reserve Bank)‚ driven by weather and water-related problems. These issues appear set to intensify until the middle of next year‚ and while seasonal factors can wear off‚ long-term structural issues remain with water security.

“Markets should care‚ because of the inflation risks and monetary policy implications‚ as well as the impact of water restrictions on output. We lower our 2016 GDP growth forecast to 1.6% from 1.9%‚”  Attard Montalto said.

Source: RDM News Wire

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Why markets should care about South Africa’s water crisis