Fitch slices growth outlook on worsening power cuts

Fitch Ratings has slashed SA’s economic growth forecast for 2023 due to the unprecedented load-shedding endured by the country this year.

In a webinar on Thursday titled “Sovereign Hot Spots” covering SA, Brazil, India and Turkey, the ratings agency said the severity of load-shedding in the first quarter meant it was now forecasting GDP growth of just 0.2% in 2023, though it expected a recovery to 1.2% in 2024. That is substantially lower than Fitch Ratings’ prediction on December 23 2022, when it said GDP would likely expand by 1.1% in 2023 and stage a mild recovery to 1.7% in 2024.

Jan Friederich, head of Europe, Middle East and Africa sovereign ratings at Fitch, said this was largely due to the scale of load-shedding from the start of 2023 to early March, which he said was equivalent to all the load-shedding experienced by the economy in the four years to 2021. The power cuts would deter foreign investment and further erode the economy’s potential growth rate, which Fitch now estimated at 1.2% in 2024. “The impact of load

shedding is clearly very serious,” Friederich said. “It will probably alleviate gradually but we also think there is a significant risk that longer term the impact on potential growth could be quite substantial … because this will now deter foreign investors for quite some time from coming into SA. This already very low potential growth rate is a significant and key weakness for the SA sovereign.”

Though Fitch kept SA’s sovereign debt rating at BBwith a stable outlook in December 2022 the deterioration of Eskom’s power-generating capacity since then, coupled with the consequent impact on economic growth could prompt a rethink. GDP data for the fourth quarter of 2022, which was released on March 7, showed GDP contracted 1.3% in the final three months of last year, thanks largely to load-shedding.

Fitch’s reduction in SA’s growth forecast came shortly after the Reserve Bank — which hiked rates by an above-forecast 50 basis points on Thursday — also said it now expects economic growth of just 0.2% in 2023, moderately lower than its January forecast of 0.3%.

The Reserve Bank “just a few minutes ago reiterated its estimate that load-shedding for this year would be taking off two percentage points off growth —a very, very substantial amount”, Friederich said.

Nevertheless, Friederich did add that the effect of loadshedding is somewhat “nonlinear” making it difficult to gauge its true impact on GDP. That is because most businesses continue to operate if faced with only an hour or two of power cuts while longer ones result in many shutting shop for the day.

On the mildly positive front he said 2023 is likely to be the worst year of load-shedding as businesses and consumers adapt by investing in alternative power sources. Government efforts to encourage the private sector to bring more generation capacity on stream, mostly from independent power producers (IPPs), could also help improve SA’s power supply, he said.

Fitch said the government’s plan to take over about R254bn of Eskom’s debt — spread out over three years — is “a little bit faster” than it expected when it affirmed SA’s rating at BB- in December but still “broadly in line” with its expectations.

Reports that the government and unions agreed to a 7.5% wage hike deal was better than the assumptions it made in its December report on SA. Nevertheless, when it warned at some point disgruntlement among union members could boil over.

“This now seems to be a twoyear deal so this danger is alleviated for quite a while,” said Friederich.

While Fitch said it expects the social relief of distress grant to be extended again when it expires in March 2024 it does not see this as a problem for SA’s fiscus. Nevertheless, it warned that if there is a substantial increase in government spending to introduce a basic income grant (BIG), it would be more worrying. “That could be a risk factor and could be negative for public finances,” Friederich said.

On revenue collection Fitch warned its projections are more conservative than those of the government, though it admitted “for some time” SA has been able to consistently overdeliver on its revenue forecasts.

“We have preferred to stay a bit on the cautious side,” said Friederich. “If the government is right, that clearly would be an upside to our forecast and would be positive for our forecast for public finances on SA.”

Though the governing ANC is widely expected to bleed support in SA’s 2024 general elections Fitch said it expects it will still emerge as the political party with the biggest voter support base “by some distance”.

Even if the ANC lost its parliamentary majority it would be likely to require the support of only one “small additional party” in order not to significantly change SA’s policy direction.

“In that situation there would be essentially no change,” Friederich said. “In fact the ANC is a very disparate organisation and in that sense it already knows how to deal with very different groups.”

He added that only if the ANC were to lose a very large proportion of the vote would its potential coalition partner become an important factor.

“But I just don’t see that as likely in the near term,” Friederich said.