12/03/2018 16:28 SAST | Updated 12/03/2018 16:28 SAST

How The Drought Will Hit Cape Town's Economy This Year

Western Cape's agricultural output will fall and capital spending on water infrastructure will rise.

Mike Hutchings / Reuters
The Voelvlei Dam, one of the Cape's largest water catchment dams, about 24 percent full on December 5, 2017.

Rating's agency Moody's warned on Monday that the water crisis affecting Cape Town would cause the city's borrowing to rise sharply, and the provincial economy to shrink – increasingly so the longer the situation lasts.

The severe drought afflicting Western Cape is expected to cut agricultural output by 20 percent this year, seriously affecting the wheat crop and reducing apple, grape and pear exports to Europe, according to national government.

The city of Cape Town is bracing for Day Zero in late August, when its taps could run dry.

Moody's said in a report that one of the most direct impacts would be on Cape Town's operating revenues, as 10 percent of them are from water charges.

The ratings agency estimates capital expenditure related to water and sanitation infrastructure could be as much as R12.7-billion over the next five years.

"The long-term solutions are likely to require significant capital and operating expenditure," said Moody's analyst Daniel Mazibuko.

The drought also threatens to slow South Africa's economic rebound, which has been fuelled by a surge in agricultural production. Cape Town generated nearly 10 percent of the country's gross domestic product in 2016.

On Tuesday last week, Statistics South Africa said the economy grew by 3.1 percent on the quarter in October-December, the highest rate since the second quarter of 2016, after expanding by a revised 2.3 percent in the third quarter. Agriculture showed a 37.5 percent expansion after rising by 41.1 percent in the previous quarter.

Government declared the drought a national disaster after southern and western regions, including Cape Town, were hard hit, freeing extra funds to tackle the crisis.