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South Africa’s worsening power crisis has hobbled the economy, slashing growth last year to almost zero and quashing any prospect of a significant pick-up in 2020 given the time required to both fix the faults at Eskom’s aging coal-fired plants and to build new generation capacity.
Load-shedding was the worst on record for SA in 2019, costing the economy between R60bn and R120bn, and will mount over the next three years unless immediate action is taken to close the gap between supply and demand, the Council for Scientific and Industrial Research (CSIR) warned in a presentation on 21 January.
Businesses, economists and rating agencies say the operational difficulties at Eskom are now the biggest threat to the economy, eclipsing even the importance of resolving the embattled utility’s financial difficulties, which are the main reason for SA’s unsustainable debt burden.“Eskom is going to cap growth going forward.
If it can’t power a struggling economy or a stationary economy, it’s not going to be able to power a growing economy,” says Jacques Nel, chief economist for Southern and East Africa at NKC African Economics.
In January the International Monetary Fund, the World Bank, the Reserve Bank and independent forecasters all revised their growth forecasts for SA this year to below 1% – below the pace of population growth – and many have warned that power shortages could further reduce the outcome.
Economists point out that the future impact of this is hard to calculate because it is impossible to predict the frequency, timing, intensity, and duration of load-shedding, which Eskom implements to prevent a national blackout.
Nonetheless, the utility has repeatedly been forced to resort to the emergency use of its open-cycle gas turbine generators, which burned R6bn of diesel in the year to mid-March 2019.
The utility has already exceeded its diesel budget by nearly 50% in the current financial year.
“The one thing we can’t quantify is the business investment which hasn’t taken place because no business which depends on electricity wants to invest in a market where it is not certain about supply or the price trajectory,” Absa economist Peter Worthington said at a media briefing on 21 January.
Electricity tariffs have soared by around 450% over the past decade, hitting manufacturing and mining industries hard, and will climb by another 53% over the coming three years if the utility wins a court battle with the National Energy Regulator of SA.
Reforming the energy sector has become the most urgent on a list of pressing structural reforms needed to reboot the economy, which will almost certainly lose its last investment-grade credit rating from Moody’s Investors Service when its next assessment is published on 27 March.
Although the anticipated downgrade has been largely “priced in” to financial markets, passive investors in the FTSE World Government Bond Index, which SA will drop out of as a result, have been unable to sell pre-emptively – so there is likely to be an outflow of $6bn from the local bond market.
This is likely to be offset in part by demand from foreign investors who buy “junk” bonds for the higher yield which they offer, which will mute the negative impact that large capital outflows have on the rand.
But Absa strategist Mike Keenan says that JP Morgan is starting to include Chinese bonds in its benchmark emerging market index, which means that the weights of South African, Brazilian and Turkish bonds will be reduced.
He predicts the cumulative outflows will make the currency depreciate to R16 a dollar by the end of 2020, from about R14.50 now.
Keenan also says that the upward pressure that rand weakness will put on inflation is likely to persuade the Reserve Bank not to lower interest rates again this year after its unexpected cut in January – a view shared by several other economists.
The other top global rating agencies – S&P and Fitch – are also likely to downgrade SA later this year, unless convincing steps are taken to implement structural reforms to unlock economic growth and to address the country’s unsustainable debt burden.
Finance minister Tito Mboweni’s budget on 26?February will be key, but a volley of his tweets over the past few weeks suggest that he is increasingly frustrated with opposition to his proposals, which have been welcomed by the private sector.
One of the main problems for SA is that the most contentious reforms – such as curbing the growth in the bloated public sector wage bill, halting bailouts to struggling state-owned enterprises, and selling off state assets – have been used by opposing factions within the ANC to fight proxy battles as they try to undermine President Cyril Ramaphosa and his allies.
Although he appears to have the upper hand at present, a mid-year meeting of the ANC’s National General Council will be a test of his ability to fend off his opponents and secure a second term in office.
“It’s looking increasingly difficult for the executive and his team to push through reforms, and the policy clashes we have seen so far don’t give me the confidence that their implementation and growth-enhancing steps will be accelerated,” says Nedbank economist Isaac Matshego.
But there are chinks of light in the tunnel ahead.
At a two-day lekgotla in late January, the ANC endorsed a market-friendly approach to the country’s energy shortfall, saying municipalities could procure their own energy, the independent power producer programme would be expanded, and regulations eased around the self-generation of power by businesses.
Businesses have been clamouring for more leeway to generate their own power for months, and the CSIR says that easing restraints on commercial and household power generation could allow as much as 1 200MW of power supply to be introduced this year, rising to 4 900MW by 2024.
This would quickly help ease the demand pressure on Eskom, without requiring the utility to spend any money.
The lekgotla also endorsed Ramaphosa’s view that some of the country’s 740 state-owned enterprises (SOEs) would be rationalised or consolidated.
But the ANC also indicated that the party was still determined to keep control of the economy in the hands of government, with a suggestion to establish a new public entity to compete alongside private power producers.
If the reform is delayed until such an entity is established, the process will not begin fast enough to address power shortages timeously.
To be taken seriously, Mboweni’s budget must show that the government will halt continuous bailouts to struggling SOEs, which have been the main drain on its ability to spend productively and to extricate itself from a dangerous debt trap.
The country’s ratio of debt-to-GDP has nearly trebled to 60% from 24% in 2008 – one of the biggest increases seen in any emerging market.
The ratio does not include contingent liabilities, which is mainly the debt issued by the near-insolvent SOEs.
Debt service costs are growing at more than double the speed of any other area of government spending and the budget deficit has swollen to 6.5% of GDP.
Moving off this alarming trajectory will be impossible without a significant increase in economic growth, which will take years even with the most effective reforms.
“The scale of South Africa’s debt means that arresting its rise would require a significant reduction of the scale and the scope of the state. We doubt that this is politically feasible given the composition of the ruling party and the country’s pressing social needs,” Capital Economics analyst John Ashbourne said in a research note.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article originally appeared in the 6 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
