South Africa facing recession and downgrades if load shedding continues: Investec
South Africa’s economic growth faces increased risk in the coming months as prolonged load shedding is set to continue, says Investec chief economist Annabel Bishop.
The outcome for GDP in 2022 will now depend on how long the country experiences severe outages, she said in a research note on Friday (1 July).
“A couple of days of stage 6 load shedding in one year will neither derail economic growth, nor credit ratings’ outlooks for South Africa, but persistent severe load shedding will – while South Africa enters a worsening global economic environment in the second half of 2022 as well.”
“This comes as South Africa’s fiscal metrics have been benefitting from both improved revenue collections – on the back of high commodity prices and increased SARS efficiencies – and the dampening effect of high inflation itself on the debt and deficit ratios to nominal GDP.”
After the strong Q1 2022 GDP outcome, Bishop said the second quarter of this year is likely to record a contraction on the back of the flood damage in the KZN province, and the ramp-up in load shedding, along with the weakening in global demand and low confidence levels.
The electricity grid has been under severe strain, with Q3 2022 starting off with stage 6 load shedding, afflicting the economic growth potential. Load shedding contributed to the decline in economic growth from above 5% y/y in 2008 to 0.1% y/y by 2019, she said.
“An economy cannot function to its full potential with insufficient electricity supply, and the parlous state the recent strike action has also had on electricity production, along with the intentional sabotage of electricity power stations and infrastructure has damaged H1 2022 GDP.
“Q2 2022 has proved to be very different to Q1 2022, and Q3 2022 takes many of the suppressing effects from Q2 2022, including sharply higher interest rates and weakening global demand, with global recession a concern.”
Bishop added that South Africa is unlikely to see GDP growth of above 2.0% y/y for 2022, with Investec now forecasting growth of 1.9%. But this figure is at risk of coming out severely lower as much will depend on the length of severe load shedding, she said.
“If stage 6 persists, or worsens, South Africa will likely see a GDP contraction in Q3 2022, after Q2 2022’s drop.
“While this would be a technical recession caused by structural weaknesses, slowing global economic growth will help to weaken activity, as will higher interest rates, high inflation, depressed business and consumer confidence, and weaker investor sentiment.”
Credit ratings
As South Africa is at increased risk of recession the longer stage 6 load shedding persists over the second half of 2022, or even persistent stage 4 power cuts, credit ratings agencies are likely to reassess South Africa’s positive outlooks, and could turn them to negative, Bishop said.
“South Africa was not at risk of credit rating downgrades from a few days of stage 6 load shedding early this week, but persistent damaging load shedding over H2 2022 would increase South Africa’s risk of credit rating downgrades, as indicated by a switch to negative outlooks.
“Government needs to rapidly remove the red tape, and any regulations, in the electricity sector that impedes private sector renewable energy investment, as failure to do so will doom South Africa to increasingly frequent recessions as government cannot fix the issues alone.”
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