Reserve Bank sounds the alarm for South Africa’s economy
The South African Reserve Bank (SARB) last week made a shock revision to the country’s GDP growth outlook for 2023, taking the forecast down to a paltry 0.3% for the year.
SARB slashed its 2023 growth forecast for SA to 0.3% from 1.1% at the time of the previous (November 2022) meeting. Its 2024 and 2025 forecasts were also lowered notably, to 0.7% (from 1.4%) and 1.0% (from 1.5%), respectively.
The key reason for the downward revision, the central bank said, is the scale and extended duration of load shedding in the country, adding that rolling blackouts have knocked out two whole percentage points from the annual growth outlook.
Economists at the Bureau for Economic Research (BER) agree with the SARB’s projections, with the group’s own data pointing to annual growth below 1% for the year.
The BER said that the SARB’s position on load shedding has sparked debates among analysts and the market over how protected the economy is by load shedding mitigation efforts like solar and diesel generators.
The sense, the BER said, is that South Africa is largely protected from stage 1 and stage 2 load shedding – but nowhere near ready to face persistent stage 4 and higher.
“The SARB’s argument, articulated in the post-MPC investor feedback session on Friday (27 January), is that while they agree with a much reduced economic impact of lower stages (1 and 2) of load-shedding, it is not clear that firms and households are sufficiently protected against power cuts at stage 4 and above, ” said the BER.
This is bad news for the economy as power utility Eskom has not been able to keep load shedding below stage 4 for very long, and 2023 has already seen the worst stage 6 levels on record.
Alarms have been sounding across all sectors in South Africa in the face of non-stop load shedding. From small businesses – who say they are facing collapse – to massive, critical industries, who are spending millions of rands each month to try and escape the dreaded blackouts.
According to the BER, major production companies have warned of the toll load shedding is taking on business – affecting the country’s food supply, mining and shopping malls. Losses relating to load shedding are mounting across various sectors – specifically within the agricultural and mining sectors.
The group highlighted commentary coming from a handful of companies expressing this alarm:
- Sibanye Stillwater (mining): The worsening power constraint could lead to the early closure of marginal shafts and reduces the appetite to invest in capacity expansion, said Sibanye Stillwater.
- Impala Platinum (mining): The company reported that output in 2023 is likely to be down compared to 2022. “If the situation worsens, at some point, the company will stop sending people underground on certain days.”
- SA Canegrowers: The group’s scenario modelling shows that continuous load shedding at stages 4-6 will cost growers more than R723 million in 2023.
- Astral (poultry): South Africa’s largest poultry producer has warned it would suffer severe operational disruptions through the first quarter of 2023 due to load shedding. These disruptions result in abnormal/additional costs, as well as substantial production cutbacks – pushing chicken prices up for consumers.
- Nando’s (fast-food): Has wanted of the threat to their fresh food supply.
- Truworths (retail): Despite its stores still being able to trade through power cuts – it is likely fewer people will be visiting malls in South Africa.
The woes of the agricultural sector have the most immediate impact, with operational costs skyrocketing and price increases having a knock-on effect.
Intense power rationing adversely impacts farming operations, especially those relying on irrigation, said the BER.
“According to the Bureau for Food and Agricultural Policy (BFAP), a third of total farming income in SA directly depends on irrigation. Irregular irrigation, or during suboptimal times of the day, raises costs and also threatens the size and quality of crops.”
For the mining sector, load shedding not only hampers production but makes doing business far more expensive in light of a recent 18.65% electricity price hike, the Minerals Council South Africa said that the mining industry costs would increase by R13.5 billion (33.7%).
The higher cost of electricity means the share of energy in intermediary inputs will increase from 24% to 38% in gold mining, from 22% to 37% in iron ore mining, and from 13% to 19% in the platinum group metals sector, said the Minerals Council.
“The increasing difficulties Eskom has in keeping the economy supplied with electricity coupled with the tariff increases add to the negative economic sentiment in South Africa at a time when unemployment is at a record high, and the country desperately needs urgent fundamental structural and regulatory reforms to stimulate the economy,” said Henk Langehoven, the chief economist of the Minerals Council.
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