Surprising week for South Africa

 ·12 Jun 2023

After weeks, if not months, of being beaten down, the South African economy had a great week last week, with more than a few surprises giving the country a boost.

The most surprising bit of good news to hit – that most South Africans will appreciate before all else – is that power utility Eskom managed to suspend load shedding for most of the day over the past week. Outages were suspended between midnight and 16h00 – a pattern expected to continue this week.

The pause in load shedding comes despite the group’s breakdowns exceeding its baseline levels (15,000MW). Energy experts have attributed the reprieve to better performance at Eskom’s plants, colder weather allowing units to burn more efficiently, more diesel being burnt to boost generation, and other planned maintenance being cut, leaving units online for longer.

According to the Bureau for Economic Research (BER), Eskom’s winter rates have also kicked in, incentivising heavy industry consumers to scale back operations.

In addition to giving South African households a break, any reduction in load shedding is a significant boost to businesses that usually lose trading hours because of outages.

Other surprises for South Africa last week came in the form of better-than-expected economic data.

While anticipated by economists, most consumers would have been surprised by Stats SA’s report that the country’s economy grew by 0.4% in the first quarter of the year despite near-permanent load shedding at high stages. Meanwhile, Q4 2022’s decline was revised to 1.1%. This points to significant resilience in the economy, despite its various crises.

While the GDP print was largely in line with economist expectations, the BER noted that other data released by the South African Reserve Bank (SARB) came in much better than expected.

“The current account deficit narrowed to R66.2 billion in Q1, equivalent to 1% of GDP, following a deficit of R155.3 billion in 2022Q4 (2.3% of GDP). The headline reading improved due to a trade surplus that tripled from R34.2 billion in Q4 to R103 billion in Q1 as the value of goods exports increased more than that of imports,” it said.

Manufacturing production rose by an above-consensus 3.4% y-o-y in April, ending a streak of contractions.

The positive news for the economy also fed through to the rand, which clawed back most of its recent losses against the dollar.

The rand closed the week at around R18.70/$ on Friday – the same level as before the United States accusation that South Africa supplied weapons to Russia. According to the BER, the positive sentiment also drove a 40bps decline in the 10-year government bond yield.

The rand’s recovery was aided by a softer dollar, but was mostly attributed to an apparent effort by the South African government to distance itself from Russia – and actually be true to its claims of non-alignment – while also possibly moving the BRICS summit in August to China to avoid having to deal with its International Criminal Court obligation to arrest president Vladimir Putin if he lands in the country.

A short-lived reprieve

However, economists warn that these positives don’t equal a turnaround – and that the months ahead are more likely to hold more pain for the country.

“Amid the reprieve from bad news, we also need to highlight the other side of last week’s news cycle,” the BER said.

Notably, business sentiment, as measured by the RMB/BER Business Confidence Index (BCI), slumped by a significant 9 points in Q2 to just 27.

Concerns about load-shedding – and worries of more to come – and pressure on profitability amid elevated inflation and fast-rising borrowing costs also weighed on sentiment. This difficult business environment is not conducive to job creation, which hurts the country’s productive capacity over the longer term, the group said.

South Africa’s economic growth, too, is under threat, it said. This was reflected in the IMF assessment on the country which also came out last week.

The IMF expects unemployment to increase as growth will be too weak to create enough jobs to absorb new entrants into the labour market. It also predicts the country’s fiscal position will deteriorate due to lower revenue from mineral exports, Eskom’s debt relief, the higher wage settlement and rising debt service costs.

The IMF flagged the urgency of structural reforms beyond South Africa’s energy sector as a growth concern, estimating 0.1% GDP growth for the year. The group’s downside scenario, however, is a decline of 1.8%.

This was echoed by economists at Nedbank, who said that South Africa’s GDP boost and news cycle breather are likely to be short-lived. The bank also sees only 0.1% growth for the year, with all its risk scenarios on the downside.

“The modest bounce in Q1 is likely to be short-lived. Load-shedding intensified into Q2, weighing on confidence, disrupting operations, driving up production costs and eroding profits and income,” the bank said.

“These pressures, combined with the downturn in global growth and commodity prices, will hurt production and exports even further in the quarters ahead.

Read: South Africa’s load shedding pain is far from over

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