Over the medium-term, the pace of South Africa’s recovery will be affected not only by weak demand, but also by more structural problems, says the South African Reserve Bank (SARB).
In a report on Tuesday (6 October), the SARB said that two areas stand out: electricity shortages and the country’s fiscal situation.
South Africa has suffered from periodic electricity shortages since 2007. While these appeared to ease following the 2009 crisis, this effect was achieved by weaker-than-expected economic growth, together with a ‘keep the lights on at all costs’ strategy, which succeeded by deferring maintenance and therefore increasing the fragility of the system, the SARB said.
Load shedding resumed in 2015 and has persisted since, with 2020 having already become the worst-ever year in terms of total gigawatt hours shed, passing the 2019 record on 13 August.
“Although electricity demand collapsed under the initial lockdown, and some capacity was opportunistically taken off-line for maintenance, the increase in unplanned maintenance lasted less than a month, affecting at its peak an extra 10% of generating capacity.
Load shedding resumed on 10 July due to unplanned outages caused by breakdowns, and Eskom continues to warn that electricity shortages will persist through 2021.
These power outages will interrupt economic activity and disincentivise new investment, the SARB said.
“Forecasts suggest GDP is still around 20% below where it was this time last year, and yet electricity usage is essentially back to pre-crisis volumes.
“The electricity-intensive mining and manufacturing sectors are, however, back to around March levels of output, which helps explain the resurgence in electricity demand.”
The fiscal situation is a second threat to the economy, along several dimensions, the SARB said.
Over the past decade, South Africa has added more debt, relative to GDP, than any top 20 emerging market, except Argentina, it said.
Forecasts indicate that South Africa will also be growing debt by more than any of these countries over the next two years – although forecasts for Argentina are not available.
“While the 2009 starting point for debt was low, at less than 30% of GDP, a decade of debt accumulation has raised that number to 63.5% as of 2019/20, which is likely to become 81.8% this year, pushing South Africa well above the broad emerging market average of 63.1% according to the IMF.
“While efforts were made to contain this debt growth, these initiatives relied more heavily on tax increases than spending cuts, with minimal contributions from reform initiatives.”
Meanwhile, high debt levels are likely to affect the recovery through several channels, the central bank said.
“These include confidence effects and uncertainty, inasmuch as debt sustainability is in doubt, as well as crowding out via high long-term interest rates, a lower country credit rating, and reduced access to foreign savings.
“The major supports to growth are record-low short-term interest rates and extensive opportunities for structural reforms.”