South Africa flirting with a full-year recession

[Nat Quinn]

While South Africa may have been able to avoid a technical recession in the first quarter of the year, Eskom’s bleak outlook for the coming winter means the possibility of a full-year recession cannot be ignored.

This is according to economists from the Bureau for Economic Research (BER), who say that a clearer picture of the country’s full-year GDP outlook will become apparent in the coming weeks as more Q1 data is published – but things aren’t looking great.

In a market note on Monday (22 May), the BER said its current projection for full-year GDP growth in 2023 is sitting at 0.2%, in line with estimates from the South African Reserve Bank.

In general, South Africa’s growth prospects for the year are incredibly low across almost all analytics and finance groups. They range from a paltry 0.1% from the International Monetary Fund to a still pedestrian – and wildly outdated – 0.9% from National Treasury in its February budget.

The BER said its 0.2% projection is based on its earlier load-shedding outlook report from April. Like the SARB, the BER and other market analysts peg South Africa’s bleak growth outlook on severe levels of load shedding.

The SARB anticipates 250 days of load shedding this year, through which two percentage points of growth will be wiped off the map.

However, on Thursday (18 May), power utility Eskom provided a system update heading into winter, in which it warned that load shedding is likely to escalate in the coming months, even pushing as high as stage 8 if specific mitigation efforts prove ineffective.

This means that the already low GDP projections could prove to be even worse – possibly putting South Africa into a full-year recession.

“With electricity demand set to rise as temperatures drop and with more than 3,000MW of generating capacity unavailable due to long-term outages through the winter months, Eskom’s baseline outlook is for prolonged periods of stage 3 to 5 load-shedding through August,” the BER said.

To mitigate against the projected demand-supply imbalance, as per normal, Eskom plans to cut back on planned maintenance through the winter months. This will be limited to a maximum of 3,000MW, down from more than 5,000MW.

In addition, the utility has secured R30 billion for diesel expenses in the 2023/24 (April 2023 to March 2024) financial year. This will enable increased utilisation of Eskom’s open cycle gas turbines (OCGTs) during the next several months.

Eskom will also embark on a renewed demand-side management drive to create awareness of measures to reduce power consumption.

“Importantly, if these interventions are insufficient and/or in a scenario of greater-than-expected unplanned outages/industrial action at key generating units, Eskom envisages being forced to implement load-shedding of up to stage 8. This would imply a further four hours of power rationing on top of stage 6, i.e., 16 hours of load-shedding in a 32-hour cycle,” the BER said.

Recession

Businesses have accepted that stage 8 load shedding is all but guaranteed, and energy experts have warned for months that stage 8 outages would be certain – perhaps even moving beyond those levels.

According to the BER, these elevated levels of load shedding are beyond what it has modelled so far – thus, its 0.2% estimate for GDP growth could ultimately prove to be optimistic.

“It has to be said that possible periods of stage 8 power rationing were not part of our baseline forecast in April. Still, at that stage, we already pencilled in real GDP growth of a mere 0.2% for 2023, and flagged more-intense-than-assumed load-shedding as a risk in our forecast report.

Because of this, the group said that the risks outlined by Eskom raise the possibility of real GDP contractions in the winter quarters, i.e., 2023Q2 and 2023Q3, as well as calendar 2023.

“For now, we are holding off from further downscaling the GDP forecast until the release of the 2023Q1 GDP figures on 6 June and the 2023Q2 BER business surveys shortly after,” it said.

 

 

SOURCE:South Africa flirting with a full-year recession (businesstech.co.za)

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