When finance minister, Enoch Godongwana, delivers his Medium-Term Budget Policy Statement (MTBPS) towards the end of the month, he will need to focus on policies that accelerate real economic growth and address the financial future of Eskom, say wealth management specialists at Citadel.
Maarten Ackerman, chief economist at Citadel, says all eyes will be on Godongwana to see if he will prioritise pragmatic policies that stimulate real business growth and job creation, instead of bowing to populist pressures that prioritise social spending but have no lasting positive impact on the country.
“South Africa is still stuck in a balancing act between weak growth and populist needs that will continue indefinitely, such as the Basic Income Grant,” said Ackerman. As a country, it is vital that South Africa gets the economy going to address poverty and inequality in a sustainable way.
“In terms of South Africa’s macro-economic outlook, it’s essential to note that there was yet another revenue windfall in addition to the revenue overruns in recent years. So, we’ll need to see what the finance minister does with that. We’d like to see the windfalls being used productively – not just on once-off, temporary social spending that does little to nothing to drive economic growth,” the economist said.
From an investment perspective, Citadel’s chief investment officer, George Herman, urges Godongwana to address the Eskom situation. “We would appreciate any guidance the finance minister can give in terms of the intention to de-leverage the Eskom balance sheet. I think and hope that is going to be a core focus of the 2022 MTBPS,” said Herman.
Eskom has requested that the government relieve its debt balance sheet of approximately R200 billion, while recently informing the Standing Committee on Public Accounts that it was carrying a total debt burden of approximately R400 billion, which could not be serviced due to its current cashflows and liquidity problems.
It was also facing outstanding municipal debt to the tune of around R40 billion.
It was recently reported that Eskom expects to receive tranches of R20 billion of taxpayers’ money over the next few years to deal with its debt-servicing commitments, much to the dismay of taxpayers who are already paying for a service they are not fully receiving as a result of the rolling blackouts, which have recently escalated.
In 2021, Citadel also expressed the hope that the minister would be prudent and use the opportunity presented by additional revenue to get the country out of its “very tight fiscal position”. At the time, Ackerman said: “If we don’t get the economy going very soon, we might have some further fiscal challenges in the next two to three years.” Today, fiscal reform is still a great priority.
Colin Coleman, the former MD of Goldman Sachs in Sub-Saharan Africa, told BusinessLive that the budget is about more than making the numbers look good for the ratings agencies. “It’s about how we’re breaking out of our structural constraints and problems.”
“Yes, the benefit of fiscal consolidation is to reduce the cost of capital to increase investment, but that’s an insufficient condition for investment,” he said.
Coleman stressed that the budget also needs to address the “festering sore” that includes unemployment, lawlessness, corruption, public mismanagement, and the country’s structural low-growth issue.
Deep structural woes at Eskom
Intellidex chair, Stuart Theobald said that South Africans know that the country is deeply rooted in an energy crisis, but may not understand the staggering challenge that lies ahead of it.
The analyst noted this past week that, based on outdated estimates in the country’s 2019 Integrated Resource Plan, it will need to procure and develop approximately 78,000 MW of energy capacity by 2030.
By 2035, however, 12 of Eskom’s 15 coal plants will have retired, wiping 33,000MW from the grid. If an optimistic plan by the government to get newer stations like Medupi and Kusile fully operational and the lifetime of Koeberg is extended, this means that South Africa needs to get at least 50,000MW of new energy on-grid over the next 12 years, Theobald said.
This is a ‘stupifying’ amount of energy required, he said, and South Africa faces an incredible challenge on two key fronts: cost and politics.
On the former, the Intellidex chair said that even leaning into cheaper energy technologies like renewables will carry immense costs.
“Solar photovoltaic and onshore wind is now much cheaper than fossil fuel production, but you need storage to even out supply capacity. Based on current global capital costs for different types of technologies, we need to invest R1.8 trillion to R3 trillion to build that capacity, depending on technology spread,” he said.
“And that doesn’t even consider the investment required to expand the grid to handle the volumes.”
The analyst noted that this cost is staggering – accounting for up to half of South Africa’s entire GDP, and even spread over 10 years, is equivalent to the total spend of a Medupi every year.
On top of the cost, South Africa’s energy sector also has to deal with the other massive hurdle: the government.
Theobald noted that the country is awaiting the results of a 9,600GW energy bid window, but historically, politics and generally poor management of procurement have delivered very little.
Urgent procurement of 2,000MW of energy ended up delivering only 150MW, and the most recent bid window saw only three projects – out of 25 – deliver, totalling 420MW. The analyst said that the country has managed to deliver only 1,400MW of new energy over the last few years.
Meeting the challenge
While the challenge appears insurmountable, Eskom itself is quite optimistic that it is able to meet it.
Presenting at the Africa Renewable Energy Investment Summit in September, Eskom chief executive officer Andre de Ruyter outlined the group’s strategy to tackle the new generation problem, emphasising a strong focus on renewables as the way forward.
Compared to coal, renewable projects like wind and solar farms cost less to build, can come online in less than two years, and can ensure that the country can protect its power exports amid rising carbon tariffs, he said.
In contrast, new coal builds would come at double or even quadruple the cost, take up to 12 years to complete – which would result in even more load shedding – and would put 46% of South Africa’s exports at risk as the country would fail to decarbonise.
By the end of 2024, de Ruyter said that most of the 33,000MW shortfall caused by the decommissioning of power stations will be covered by new projects, including:
- 3,500MW from the Seriti renewables projects
- 1,440MW from Kusile entering full operation
- 2,000MW from independent power producers (IPPs) on leased land
- 3,500MW from new pumped storage
- 1,500MW from municipal procurement
- 2,600MW from REIPPP 5 projects
- 5,200MW from REIPPP 6 projects
- 7,000+MW from other projects
This energy shift is not cheap, however, with the CEO pointing out that R1.2 trillion will be needed to realise the transition.
Adding firm capacity of 7,000MW, variable capacity from renewables totalling 50,000MW and storage capacity of 10,000MW will cost approximately R990 billion to realise by 2035, he said.
Expanding and strengthening the power utility’s transmission network over 8,000km of new lines and installing 101 new substations will cost another R130 billion. Boosting the distribution capacity will add another R56 billion to the mix.
Meeting demand for economic growth
Eskom can’t meet demand and has imposed a record number of days of blackouts so far in 2022, according to Bloomberg calculations.
Load-shedding is projected to shave 1 percentage point off economic growth this year. The South African Reserve Bank lowered its gross domestic product growth forecast to 1.9% from 2% in September.
Reforms aimed at alleviating South Africa’s energy crisis could raise real private investment in the energy sector by as much as 15% per year from 2023 to 2025 and raise economic growth by about 0.9 percentage points over the first year, the central bank said.
“Investment in energy has the potential to crowd in other productive investment, creating a virtuous cycle,” the bank said in its six-monthly Monetary Policy Review, as reported by Bloomberg.