Rand and rating firms on notice as Eskom load shedding intensifies and further wage strikes loom

Eskom has again taken centre stage at a time when South Africa can ill afford blackouts at increasing regularity, and for longer periods of the day – while strike action is also unwelcome amid growing global economic concerns and rising inflation.

Russia’s invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, according to the World Bank’s latest Global Economic Prospects report. This raises the risk of ‘stagflation’, with potentially harmful consequences for middle- and low-income economies alike.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” said World Bank president David Malpass.

In South Africa, Business Unity SA (BUSA) on Wednesday (29 June) noted with grave concern Eskom’s move to stage 6 load shedding.

“The implementation of stage 6 load shedding is a serious blow to an economy that is already struggling with low growth and a lack of decisive action on the part of the government to make the necessary interventions to attract investment and put the country on a sustainable and inclusive growth path,” said Cas Coovadia, Business Unity SA CEO.

“The implementation of stage 6 load shedding will be a serious blow to all sectors of the economy and could lead to small and medium businesses buckling under the pressure of managing an untenable situation. We must stress that while this is a serious and negative impact on the economy, we are, unfortunately, not surprised that we have reached this crisis situation,” he said.

“We have been urging the government for numerous years to remove all barriers to private sector intervention in the generation of energy and power, but it is only recently that the government has heeded these considerations. We welcome the number of embedded energy projects that have been authorised by NERSA and progress on the current bid window for renewables, but these now must be the norm rather than the exception,” Coovadia said.

BUSA also expressed concern over the unprotected wage strike at the power utility.

“We now urge the government to do whatever is necessary to enable Eskom to move away from high levels of load shedding as a matter of urgency, to deal decisively with reported acts of sabotage at Eskom by enabling law and order agencies to act with urgency to bring those responsible for such sabotage to book and to remove any remaining barriers to private sector generation of power and getting renewables onto the grid as quickly as possible.”

Eskom said workers are returning to their posts, without any signs of unrest, following a meeting between the company and labour groups, Bloomberg reported Wednesday.

Protests started after wage negotiations stalled earlier this week, as roads to power plants were blocked and petrol bombs were thrown at the homes of managers, resulting in the worst electricity shortages since 2019. Unions asked workers to “give the process of negotiations a chance” after resuming discussions with Eskom over a wage offer.

“Many employees are peacefully returning to work and there are no incidents of protest reported so far today,” spokesperson Sikonathi Mantshantsha said in a text message. “The details of any wage offer will be made known on Friday when the wage negotiations resume.”

The National Union of Mineworkers and National Union of Metalworkers of South Africa said in a statement late Tuesday that meetings with the company made “considerable progress in that negotiations have been able to break new ground with a new offer.”

The wage talks “will undoubtedly be watched closely by policymakers,” BNP Paribas senior economist Jeffrey Schultz said in an emailed note. The central bank, “because of the threat of higher wage settlements into inflation, and the Treasury, which is currently in the throes of its own wage negotiation with unions that continue to demand 10% wage hikes.”

Schultz noted that unions are currently demanding a 12% wage increase versus the company’s offer of 4.7%. The economist noted that Eskom is considered an “essential service” any decision to strike by employees is considered illegal and hence unprotected – a dismissible offence.

Rand volatility

Analysts noted that the rand has begun to take some direction from Eskom’s troubles in recent sessions. “Yesterday (Tuesday) saw the rand weaken to near R16.10 levels on the back of a stronger dollar, month-end importer demand, and electricity supply issues,” said TreasuryOne in a note.

“The country was moved to stage 6 load-shedding as Eskom battles severely constrained generation capacity. Further dollar strength and Eskom woes could see the rand test R16.20 in the short term.

Investors have generally priced load shedding into the value of the rand in recent sessions, however, RMB’s fixed income and currency analyst Kim Silberman told BisinessLive that analysts are beginning to question whether the commodities rally can counter the domestic growth story. “Up until now, most analysts have been relying on the commodity boom to carry SA’s fiscus.”

With talk of a potential recession, Silberman said that the commodity story is starting to look vulnerable, with prices coming off quite meaningfully. She said that any growth is therefore going to have to come from what is happening domestically, “and then we need electricity to come to the party”.

“With this kind of load shedding, it is difficult to see any real GDP growth over 1%.”

With the rand averaging R15.59 against the dollar so far this quarter, the domestic currency is likely to attain its forecast (average) rate for the second quarter, while it is now tracking towards R15.80, its third-quarter forecast, said Annabel Bishop, chief economist at Investec.

The economist said that the rand has gained from its geographical distance from the Russian/Ukraine conflict, and from Europe in general, as well as from portfolio disinvestment from China, with China seen as aligned with Russia, and having increased imports of Russian energy commodities.

“While initially positive for the rand – which would likely see further weakness if the US continued to deliver large interest rate hikes this year and next – the domestic currency will also remain volatile, and at risk of particular weakness on global recession.”

News24 meanwhile, reported that the Eskom newsflow has already created significant damage.

“If it is just a day or two, the overall economic impact, as well as the impact on sentiment, is limited compared to a scenario where it runs for a week. Similarly, the impact on credit ratings will depend on how long it lasts,” said Old Mutual Wealth Investment strategist, Izak Odendaal.

Odendaal said rating agencies are well aware of the issues in South Africa. While things were currently “very dark”, the various reforms that allow more significant private generation over time gives them comfort that this will not be a permanent feature, providing hope for “light at the end of the tunnel”.

Further worrying signs

BNP Paribas economist Schultz said in a research note in April that a confluence of factors in South Africa, including deep economic variables, event risk and rising wage expectations could trigger more strike action later this year as employers and employees fail to reach an agreement.

The country has already experienced a busy start to strike season, most notably in the commodity sector.

“We think a period of unrest is most likely in late winter (August), due to the historical expiration of wage agreements – for the private sector – in early winter,” said Shultz.

“We expect unions’ opening demands in the coming days/weeks to be a rise of around 7-8%. Labour unrest could feed into general dissatisfaction among the South African population, we think, as socio-economic conditions continue to deteriorate.”

And while not a wage dispute, Tiger Brands plans to close a fruit and canning operation in South Africa’s Western Cape province which may result in the loss of more than 4,000 jobs, the region’s government said.

Bloomberg reported that talks are underway between authorities and the company to look at ways to keep the Langeberg & Ashton Foods facility open.

Tiger Brands, Africa’s largest listed food maker, announced last week it’s in talks with employees about shutting down the plant after failing to find a viable buyer since announcing plans two years ago to exit the business. Western Cape Premier Alan Winde said interested parties are engaging with the company about the enterprise, as it encouraged other potential buyers to come forward.

“Tiger Brands wants potential buyers to demonstrate that they have sufficient working capital to keep the cannery operating as a going concern,” Winde said.

Farm-lobby group Agri SA has said the Langeberg & Ashton factory is the biggest in South Africa and one of only two fruit-canning plants in the country.

Schultz said that sectors will face hostility from powerful public-sector unions which have suffered two years of wage freezes after the government broke the third year of their three-year 2018 wage agreement.

Read: Big price hikes hitting South Africa this week

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Rand and rating firms on notice as Eskom load shedding intensifies and further wage strikes loom