The Economic Impact of Cape Town’s Water Crisis

Cape Town has been in drought for three years. The situation is the same across most of South Africa. Other cities like Pretoria, Durban, and Gauteng are also facing a severe shortage of water. At the present moment, water is being rationed by government agencies across most of South Africa.

However, the problem with Cape Town is that it is going to completely run out of water by April. This kind of situation has not been faced by any city in the recent past. Any kind of natural calamity always has an economic impact. The Cape Town water crisis is no exception. In this article, we will have a closer look at how the economy of Cape Town and South Africa are likely to suffer because of this issue.

Ratings Downgrade

The South African sovereign bond has a rating of Baa-. This rating has been provided by Moody’s. However, even the ones provided by Standard and Poor’s and Fitch are in the same range. These ratings mean that the general population considers South Africa’s bonds to be investment grade. However, this is the last investment grade rating. Any downgrade from hereon would put South Africa’s national debt in the junk bond category. We all know that the yields on junk bonds are precariously high. Hence, if South Africa has to issue debt at such high yields its finances will be badly affected. Also, South Africa may have to issue more debt at these higher prices to build more infrastructure projects and to mitigate the natural disaster that is being faced by their common people.

Law and Order Situation

South Africa has one of the world’s highest rates of income inequality. This means that when the water crisis hits Cape Town, the lower strata of the society are likely to be badly affected. People with higher incomes may be able to buy water for their daily needs. However, poor people do not have the money to do so. Since water is a basic human need, it is likely that this situation will deteriorate into a riot. The police and government authorities of Cape Town are already preparing themselves to mitigate a law and order crisis. Regardless of their efforts, such a crisis is likely to have deep financial as well as humanitarian impact.

Higher Spending On Emergency

If the water in Cape Town city completely runs out, the city may face a massive emergency. Firstly, there will be law and order crisis which will not only be inconvenient but also expensive. Secondly, the state of health and sanitation is going to be badly affected. The government may find that suddenly a lot of people are falling sick. This may exert pressure on the already pressurized public health care system in South Africa. South African citizens will expect their government to help the citizens in case of such an emergency. It is true that humanitarian aid from Red Cross and other countries may provide some temporary relief. However, the expenditure on health, sanitation, and safety is likely to go through the roof if this crisis is not contained or averted.

Tourism and Agriculture Decline

Tourism and agriculture are the two biggest professions in South Africa. Tourism contributed to about 11% to the GDP of the nation and agriculture also contributes an equal amount. The problem is that once the water in Cape Town runs dry, both these sectors are likely to be negatively affected.

Tourists will not be excited with the prospect of visiting a country where people have to stand in queues outside military establishments to get their daily share of water! Also, the local people may not be able to do their jobs and serve tourists well since a lot of their time will be spent standing in queues to obtain water for survival. The domestic tourism in South Africa is also likely to be decimated by the impact of this water crisis.

Agriculture and industry have been using water indiscriminately in South Africa. This is one of the major reasons behind the Cape Town water crisis. Hence, the rationing of water to the agricultural sector may also be limited. For instance, the wine industry in Cape Town has been one of the major consumers of water. However, now with this crisis, the wine production has been drastically cut down. This will also negatively impact the employment in those sectors which will add fuel to the fire of economic turmoil that South Africa is likely to be facing.

Over a period of time, the Cape Town water crisis is likely to evolve into a crisis of food grains as well. The future does appear to be very bleak if the government authorities are unable to somehow avoid this crisis.

Lost Revenue From Taxes

Lastly, about 15% of the taxes that the city of Cape Town earns come from the water supply. If there is no water supply, obviously there will be no water taxes as well. Hence, the city of Cape Town will face a triple whammy of sorts. They will find that their income has been reduced by at least 15%. However, at the same time, their expenditures of necessities will more than double. To add to their woes, the interest rate at which they can obtain these funds is also likely to rise substantially.