WHAT IS ESKOM COSTING THE ECONOMY?
South Africans should prepare for ongoing, low-level load-shedding in the coming year. This will depress growth but not destroy it completely
Economists are revising their SA growth forecasts downwards for the year as concern mounts over the future of SA’S electricity supply coupled with weak domestic economic data, a slowing global economy, continued drought in parts of the country and mining unrest.
In recent weeks, every piece of December’s high-frequency economic data surprised to the downside. Coming on top of sudden, unplanned stage 4 load-shedding, it seemed as if the economy had once again hit the skids.
Finance minister Tito Mboweni’s grim budget failed to alleviate the gloom, as tax hikes and spending cuts will further dampen economic activity, while the R23bn annual bailout for Eskom will cover only a portion of its interest bill at a time when severe operational challenges are exacting a heavy toll on the economy.
The resumption in severe load-shedding is hurting the economy, not only directly in terms of lost production, but also in terms of fixed investment and job creation forgone as businesses shelve expansion plans.
“We’ve reached the precipice after a long downhill slide,” says Shaun Nel, a spokesperson for the Energy Intensive Users Group. “It’s a disaster for the economy but it’s not as if this is something unexpected, the signs were there.”
Nel doesn’t buy Eskom’s assurances that there will be relief from ongoing load-shedding by April. He expects a continuation of stage 1 and 2 load-shedding for at least the next 12 months, as the overriding problem is that
Eskom hasn’t been carrying out proper maintenance on its ageing fleet of power stations.
Medupi and Kusile were supposed to provide a cushion of extra supply to allow older units to be refurbished. But with the two new power stations running half-cocked, it doesn’t appear as if Eskom will be able to carry out significant maintenance for the foreseeable future.
Last week, public enterprises minister Pravin Gordhan admitted Medupi and Kusile were “badly designed and badly constructed”. External engineers will be brought in to help resolve the problems.
“Eskom is going to be a significant headwind on progress in the economy this year,” says Nel. “And the impact will extend beyond 2019 because a lot of companies that were planning to expand their plant this year won’t do so. Eskom won’t have the additional capacity to supply them and, even if it did, the tariffs would be unaffordable.”
Hundreds of billions of rands’ worth of mining investment is at stake, says Minerals Council SA chief economist Henk Langenhoven. He agrees with Nel that load-shedding won’t be over in April and industry expansion plans are likely to be shelved until SA’S power supply is properly secure.
According to the council’s estimates, if Eskom’s application for tariff increases above 15% for each of the next three years succeeds, 40% of mining, refining and smelting companies will be lost; annual gold mining output will fall from 132t to 20t; and 150,000 direct jobs could be shed across mining, smelting and refining.
“The situation at Eskom is a disaster for the economy,” says Langenhoven. “The only thing that gives us some hope is that because of that, Eskom won’t be allowed to fail ... There is great resolve in the government and the private sector to save the day.”
Economists are responding by revising down their growth forecasts. In October last year, the Beeld consensus was for real GDP growth of 1.7% this year. That number has been dropping steadily and is now at 1.32%.
Similarly, the Bureau for Economic Research cut its 2019 real GDP forecast from 1.5% to 1.3% last week after scaling down its forecast for both private and public sector fixed investment.
“This year is shaping up to be another challenging one for the SA economy,” it said in a research note. “Headwinds include a slowing global economy, Eskom (and other SOE) woes, adverse weather in the maizegrowing areas, prolonged strike activity in gold mining and the populist rhetoric asso- ciated with the upcoming election.”
Intellidex strategist Peter Attard Montalto revised his 2019 growth forecast down from 1.4% to 1.2% last week, citing the impact of load-shedding and the sharp deceleration in economic activity at the end of last year.
“If we have another repeat week of loadshedding and the second-half investment rebound [does] not materialise, like in 2018, then [full-year] growth could well end up being much closer to 0.7% again,” he warns.
RMB chief economist Ettienne le Roux remains comfortable with his forecast of 1.3% for 2019. Four main factors are depressing SA’S growth outlook, he says, including the fact that growth is slowing among SA’S major trading partners, Europe and China. Weaker growth in China ought to weigh on SA exports, while also preventing commodity prices from rebounding.
Domestic fiscal policy remains a drag on domestic growth, though spending restraint and a higher tax burden is necessary to help stabilise the government’s debt burden.
Third, with top-line growth under pressure, he expects the corporate sector to remain cautious and internally focused on efficiencies and cost control for much of
2019. Growth in consumer spending is also likely to remain weak by historical standards.
However, Le Roux says South Africans should guard against extreme pessimism. Granted, electricity outages will exert a toll on the economy, but a few “bright spots” remain. For example, the dollar price of iron ore is 35% higher than three months ago, gold is up 10% and the oil price is still 25% lower than its October 2018 peak of $85 a barrel.
In addition, the latest bout of rand weakness will help SA exports at a time when global growth is slowing, though certainly not collapsing. Domestic inflation should remain low and, so too, interest rates.
“None of this implies GDP growth will shoot the lights out this year. Still, at 1.3% or thereabouts it does suggest the economy struck bottom last year, fingers crossed.”