Load-shedding dims economic outlook

SA’s electricity crisis has dimmed its economic growth outlook. Investec has downgraded SA’s GDP growth forecast to 0.2% year on year, on the weakening in GDP in the fourth quarter of 2022 which creates a low base for 2023 to roll off on, and on the deepening energy crisis.

The first quarter of 2023 is likely to see economic activity contract further, by -0.5% quarter on quarter, seasonally adjusted from the last quarter of 2022’s -1.3% quarter on quarter, seasonally adjusted, which will yield a recession on a technical basis as load-shedding cuts into productive capacity.

We had expected SA’s GDP growth rate to reach 0.7% this year but the risk was to the downside, as the economic outlook has dimmed on the worsening supply of electricity as permanent load-shedding was announced by Eskom for the next two years, and potentially longer.

Electricity supply is failing to consistently meet demand, giving rise to severe bouts of loadshedding, with 2023’s energy availability factor (EAF) at 52.8% of the potential output of installed capacity available, on deteriorated production ability. In 2022 the country’s EAF was higher, at 58%, though lower than forecast in Eskom’s October 2022 Medium Term System Adequacy Outlook, which “expects a downward trend in plant performance to continue in the medium term”. This is seen to be “fuelled by increasing unplanned full and partial load losses”, while “Eskom’s generation fleet is expected to reduce by 5,288MW in 2023-2027 because of plants reaching their turbine dead-stop dates (DSD).”

Load-shedding has added to input costs for production in SA, with self-generation more expensive, while production losses (and wastage, particularly of food) increase, with food the highest weighted item and biggest driver of inflation.

We forecast CPI inflation at 5.3% over 2023 for SA, after recording 6.9% for 2022.

Inflation globally and domestically remains in focus, both the speed at which inflation is likely to fall, which could be more rapidly than now expected, and the point it falls to. For 2024 we expect CPI inflation will average 4.6%. Inflation has been sticky (slow to fall) on the downside so far, globally and domestically, but the first half of this year is expected to see inflation measures drop more rapidly, with SA reaching the midpoint of its inflation target potentially in July. After this, however, the second half of 2023 is likely to see a flattish inflation environment, with SA’s CPI inflation rate running at about 4.5%, though risk factors persist to the forecasts.

SA’s recent greylisting raises sovereign risk, placing upward pressure on interest rates, which will underpin rand weakness (along with risk averse rand sentiment), and so exert upward pressure on inflation. The domestic currency is likely to remain volatile, with the Federal Reserve leaving the door open for further rate increases. The dot plot of members’ expectations shows one further 25 basis point lift, but markets are less certain, factoring in cuts in the second half of 2023.

Risk aversion has not fallen for emerging markets yet, despite growing expectations that the end of the US rate hike cycle is now in sight and the Federal Open Market Committee (FOMC) predicting more than 1% in cuts in its Fed Funds rate in 2024, which markets think will start in the second half of 2023.

Concerns over the health of private sector banks in advanced economies are supporting risk-off, as are worries over still high inflation, while the European Central Bank and Bank of England warn of further rate hikes to tame inflation.

Fears over systemic risk have intensified in the banking sector, with the IMF warning “risks to financial stability have increased ... at a time of higher debt levels”, and that the outlook for the global economy is weak for the medium term.

The IMF has dropped its economic growth forecast for SA for 2023 to 0.1%, “mainly due to a significant increase in the intensity of power cuts, as well as the weaker commodity prices and external environment”. The multilateral recommends that SA “implement reforms to boost private sector investment, promote good governance, and improve the efficiency of public spending to shore up an economy hamstrung by rolling blackouts. Risks include delays in addressing the energy crisis and Eskom’s and Transnet’s operational and financial weaknesses.”

SA is not seeing urgent action for a substantial increase in the power supply in the short term, and energy experts expect load-shedding to worsen over winter. New build of infrastructure takes a number of years and is being inhibited by the reduction in the size of the construction industry, which shrank under the Covid-19 lockdowns on the economy that ceased business operations in the sector. The deteriorating state and insufficiency of electricity transmission is also a limitation on energy projects.

The upwards interest rate hike cycle has had a small effect on growth in comparison to the loss of productive capacity from insufficient electricity supply.

The energy crisis is having a suppressing effect on growth and job creation, and shows little immediate likelihood of being resolved, reducing business and consumer confidence, and weakening the growth outlook.