Recession risks mount if power cuts continue
Jeff Schultz, senior economist at global bank BNP Paribas South Africa,said yesterday that there was a 30to 40percent chance of recession in South Africa this year, depending on how long power cuts were implemented and how they were handled.
“Assuming that the first half of 2020 could see a minimum of 15 to 20 days of Stage 2 load-shedding, we estimate this could shave a further 0.3 to 0.4percentage points off growth, which is why we have lowered our already sub-consensus gross domestic product (GDP) growth forecast to just 0.5 percent from 0.8 percent,” he said.
“We factored in a conservative estimate purposefully. As a starting point, we wanted to flag that this was going to be a consistent theme for growth moving forward. And we use 20 days as a conservative estimate, but I’m sure that the risk is more to the downside than to the upside.”
Eskom’s cutting of 2000 megawatts from the grid was costing the South African economy R1 billion a day, he said.
Schultz said that continued electricity outages were the main reason behind the 0.3percentage point cut to an already sub-consensus 2020 GDP growth estimate, which stands now at 0.5percent.
Real GDP decreased by 0.6percent in the third quarter of 2019.
Schultz said BNP Paribas South Africa did not expect Eskom’s energy availability factor to improve meaningfully after slipping to 67percent in 2019, and as low as 56percent earlier this year.
The struggling power utility recently announced that there would be an increased possibility of load-shedding over the next 18 months as it was conducting critical maintenance to restore its ageing plants to good health.
The economy fell into a technical recession in the first quarter of 2019 following two consecutive quarters of negative growth.
The period was characterised by severe electricity-supply disruptions, continued weak business confidence and caution ahead of the national elections in May.
Real GDP contracted sharply by 3.2percent in the first quarter of last year - the largest decrease since the first quarter of 2009.
A fund manager at Anchor Capital, Stephan Engelbrecht, concurred that this bout of load-shedding would push the economy into the red.
Engelbrecht said the economy was losing four hours of productive time daily and that could grow GDP.
“I agree that if we continue with load-shedding at this current rate, and it continues for a prolonged period, the economic consequences of that can be as severe as pushing us back to recession,” Engelbrecht said.
“The one thing I can say is that Eskom has been a lot better in communicating in this round of load shedding as to when it is happening, which means that businesses can probably plan better.
"It is minimising those unintended consequences of having a factory line running and just losing inventory as you lose power, but it is still four hours of downtime which this economy can ill afford.”