Reserve Bank flags load shedding as SA’s biggest non-financial risk
Load shedding is one of the biggest non-financial risks flagged by the South African Reserve Bank in its second Financial Stability Review. The publication, which covers the period from May to November this year, is intended to stimulate debate on issues that affect the country’s financial stability.
Nicola Brink, head of the Financial Stability Department at the Reserve Bank, says the term refers to a financial system that is resistant to shocks and able to perform its functions without interruption despite a change in economic circumstances.
The biggest non-financial development affecting the South African market was load shedding. Brink highlighted this as a key concern, putting further pressure on a system already showing low economic growth.
A PwC report estimates that load shedding in 2021 caused a reduction in real GDP growth of nearly three percentage points.
“Load shedding jumped to an average of 626GWh per month in the first nine months of 2022 – a near-threefold increase from 210GWh per month in 2021. These numbers would have been worse were it not for diesel-powered generation being used,” the PwC report states.
Michael Jordaan, chairperson of Bank Zero, concurs: “A year of load shedding can run up to … R7.5-billion every month and R91-billion a year. The unquantifiable costs such as huge job losses, loss of confidence by investors and skilled emigration are wreaking long-term havoc on the economy.”
Other key risks that the Financial Stability Review noted as a result of load shedding include battery recharge constraints on automated teller machines and cellular network towers during longer stages of load shedding, and increased insurance claims from households and firms due to power surge damage, fires and crime.
“There have been much higher stages of load shedding in 2022 and there does not seem to be a short-term solution,” says Brink. “There are two channels of risk. The first is the slow-burn impact on the economy, with the increase in operational costs as companies have to make alternative plans.
“The second is the very unlikely event of a total grid blackout.… However, it is a tail risk and, ironically, load shedding is the mitigating factor against this,” she says.
Lesetja Kganyago, governor of the Reserve Bank, says that although we have moved far from the dark days of the pandemic and the policy action that followed, the current economic conditions remain shaped by the pandemic.
“Highly indebted households and firms with weak balance sheets are at risk from rising inflation,” he says.
Bank credit extension grew notably to pre-Covid levels. Brink says that between January and July this year, credit extension increased by almost R1-trillion.
“However, credit risk indicators remain benign, suggesting that banks are managing their credit risk exposure quite well,” she says.
She notes, though, that the increase in unsecured credit to households, albeit from a low base, could be an early sign of distressed borrowing by households to cover living expenses.
The profitability of the insurance sector is taking some strain as investment portfolios underperform, although solvency ratios are not under threat.
The country’s biggest short-term insurer, Santam, reported that net investment income for the six months to June was down to R225-million, compared with R355-million the previous year.