FIFI PETERS: South Africa’s economy is at risk of missing its growth targets for this year if load shedding persists as Eskom has already warned. Already preliminary data is showing the economic cracks in some of those initial growth forecasts for the economy to grow by almost 2% this year.
We’ve got the chief economist of Investec, Annabel Bishop, to shed light on what is a dark situation right now for the economy. Annabel, thanks so much for your time. The leading indicator being published by the South African Reserve Bank today shows a contraction in the third quarter. How should we interpret that, and does it mean that the writing is already on the wall in terms of the economy missing the growth mark for this year?
ANNABEL BISHOP: Hi, Fifi. A couple of things. The leading indicator really summarises some data and it gives an indication of the expectation for the economy in six months’ time. As it’s the first month of the third quarter, it is really informing us on the start of next year.
Load shedding itself as you rightly said, has been taking a lot from economic growth. In July I remember we had Stage 6 load shedding and the strike action. And then of course the leading indicator data that we’ve got really did show a drop in the manufacturing output, which showed obviously a negative impact on job hiring, of course, as well. There’s also *** slowed-down economic data that came through. So a number of different factors.
I think the key point really here is that, overall, load shedding is very, very damaging to economic activity, especially very heavy load shedding, like Stage 6, Stage 5.
Many people in the economy have learned to work with stages one to three, even Stage 4, but when you get to Stage 6, it just becomes too damaging.
We actually had a rebound in the economy in the third quarter of this year, at about 0.5%. [This is] at risk now of occurring, because of the continued load shedding through the quarter. Certainly now in September we see the energy availability factors dropping towards 50%. It really means that only 50% of the production capability of South Africa is actually being used to generate electricity, and it’s hugely problematic.
FIFI PETERS: So at what point do you start revising your growth forecast? I’m just wondering if you have done so already, given we’re in Stage 6, and Eskom has told us that things could still be bad for quite a long time. At what point do you start hitting that erase button and punching in new numbers in your growth models for South Africa?
ANNABEL BISHOP: That’ll be next week.
FIFI PETERS: What are you waiting for? Why next week?
ANNABEL BISHOP: We get the Quarterly Bulletin data out early next week, and that obviously gives us a new raft of this direct data to put into our models. And then of course on top of that we run our new assumptions and expectations. By the end of next week, certainly the start of October, we will have had our new set of economic forecasts. Originally we had an expectation of 1.9% for GDP growth this year. But of course, as we move through next week, see what the schedules of load shedding will look like as well, the risk is that we actually come out lower than that, we start heading towards the 1.5% mark.
Of course, as well, there’s the impact coming through from the global economy. We are seeing a slowdown, and of course the risk of a ramping app in interest-rate hikes as well.
We saw very severe rand weakness coming through in the last couple of weeks, particularly this week. Of course that’s been negatively affected by the load shedding, concerns of South Africa’s growth, but more severely about the United States, the risk that it might hike by more than 75 basis points; markets are starting to worry about that. So all of that is very negative for the economic growth outlook for the remainder of this year and next year.
FIFI PETERS: We have already heard some concerns being expressed by the finance minister, Enoch Godongwana, who was speaking last week, talking about the current financial position of the country not being as great as was initially projected in the February budget. But he attributed that largely to some of the impacts from the Ukraine war, the inflation and the like.
I suppose it goes without saying that the Eskom situation doesn’t make the situation any better, and potentially adds to the woes of the finance minister from a budget perspective?
ANNABEL BISHOP: Oh yes, it does. Of course as well we obviously as well have seen very high inflation in South Africa [in the] past that’s due to supply-chain dislocations – the lags that it takes to repair them. We have started to see energy prices come down since June, and of course we could see slightly lower inflation figures. But all of that doesn’t erase the fact that inflation is still very high, and of course that negatively impacts real disposable incomes. It lowers them, it lowers consumer spending in real terms. Of course, consumer spend is two-thirds of GDP, and GDP itself is estimated in real terms.
So all of these factors are building into a weaker outlook – obviously the higher interest rates coming on the back of higher inflation caused by them. And obviously the Russian/Ukraine war did exacerbate high commodity prices globally, pushed them up steeply, still keeping energy prices supported. Even though they’ve come down since a couple of months ago, they’re still high on the year.
All of these factors negatively impact South Africa – they weaken the rand obviously, because our main import is oil and gasoline prices. And of course with metal prices having come off quite substantially because of a slowdown in the global economy, because of the high interest rates caused by high inflation, obviously that also has a negative impact on South Africa’s earnings and the taxable income revenue that Sars receives.
So the National Treasury is right to be concerned, and as you weaken economic growth forecasts that elevates the ratio, whether it’s a fiscal debt or deficit.
FIFI PETERS: One more question on the numbers there that have come out of Eskom. They told us they have essentially depleted their budget for their year – their diesel budget of over or around R7.7 billion or so. We know that right now they are doing everything that they can to fix the situation, including bringing in the best skills to add their hands to the maintenance work that’s being done there – from also procuring a lot more power just to give us more capacity for the grid.
So they’re doing everything that they can, but all of that for me sounds like a lot more zeros. It sounds like a budget that’s ticking higher. Therefore my question to you is how are you thinking about the situation, just the emergency interventions that Eskom is implementing? How are you thinking about it from a budget perspective, and are you questioning right now whether Eskom will be in need of a bailout come the mid-term budget announcement next month?
Eskom wants to burn R17bn in diesel next year …
Little room to limit the 32% tariff increase Eskom wants
ANNABEL BISHOP: Well, given that we are burning diesel, and diesel is still a very high cost as you explained earlier, obviously that really does add to Eskom[‘s costs]. Eskom keeps asking for very large increases in the electricity tariff: double-digit increases, 20% and above. And of course not getting it does make the situation much worse. Also, by producing less electricity, it is selling less, and getting less income in as well. So all of these factors are very negative for it.
And of course in the budget we could well see some extra allocations towards Eskom.
Something that’s really concerning me is the fact that we obviously have lost 6 000 megawatts recently as the outages obviously had that degree of loss to electricity capacity. And we could have already have had the Karpowership giving us over 1 000 MW this month already, even last month if we hadn’t had a lot of concerns come through from an environmental perspective, and other areas which halted the deal.
And of course we’re also finding ourselves in the situation where, while we removed the self-generation limit in South Africa from 100 MW, of course there are all these regulations and red tape that producers need to go through, self-generating electricity producers at the municipalities, of course through Nersa as we’ll. So with all these regulatory hurdles the red tape is still killing and stymying business in South Africa. It’s still not providing a freer functioning market.
I think what we are really finding ourselves in South Africa as well, is that a lot of the power stations have been tripping, and of course we’re not getting that sorted out. We’re not getting the many factors which obviously cause these large electricity generating units to actually be solved.
So unfortunately it looks like load shedding could be here for the rest of this year.
FIFI PETERS: Very unfortunate. Annabel, we’ll leave it there. Thanks so much for your insights, as always, and taking the time. Annabel Bishop is the chief economist at Investec.