Eskom, the symbol of a shipwreck
The electricity shortage is responsible for the economic underperformance of the last quarter of 2022. To preserve the electricity grid and prevent a national blackout, the public company Eskom must resort to targeted power cuts. These downloads affect all sectors of activity and all regions of South Africa. They are increasing in number and intensity.
Limited to 75 days, and for a few hours in 2021, power outages were required 207 days last year, 90 of which were in the previous three months. And by 2023, they should be at least 250 days, for up to 13 hours. This is the result of three decades of inaction, mismanagement and corruption.
Between 1991 and 2021, Eskom completed the construction of only one power plant. Furthermore, the public undertaking did not carry out the necessary maintenance of the old installations. These are, therefore, often broken down and cannot produce at total capacity.
Today, the maximum actual electricity production is at most 60% of the theoretical capacity. As a result, the electricity supplied by Eskom has decreased by 7% over the last decade. But at the same time, demand has increased with economic growth, the demographic boom and the political will to connect every citizen to the network.
A burden for growth
The shortage of electricity is a disaster for the South African economy. With GDP growth of only 2%, narrowly bringing the economy back to its pre-COVID level, South Africa performed very poorly in 2022. South African growth was half that of emerging countries (4%) and even less than that of developed countries (2.7%).
Last year, however, the global economic environment was optimal for the South African economy. The war in Ukraine provoked a boom in mining prices to benefit a large country producing raw materials like South Africa. But without electricity, mining activity fell by 7% in 2022!
While a country like Indonesia posted a record trade surplus last year, South Africa’s trade balance deteriorated over the months due to strong global demand that caused its raw materials exports to explode. Far from having been a blessing, the boom in raw materials has, on the contrary, weakened South Africa by increasing the price of imports. As a result, the country’s external accounts fell into the red, and the central bank had to tighten its policy to contain price slippage drastically.
Financial fragility
Massive investment in generation and distribution capacity is needed to end power cuts. But Eskom is financially desperate, with a considerable debt representing 6% of GDP. So to give some air to the public company, the Government has decided to gradually take over 60% of the company’s debt by 2026. This will increase public debt, already very high for an emerging country, to 70% of GDP.
With 10% interest rates for 10-year maturities, the debt burden could become too heavy. All the more so as other factors weaken public finances. First, electricity cuts severely penalise economic activity and tax revenues. With prices slipping, the Government also had to concede a 7.5% wage increase. The public sector payroll accounts for half of public spending, which will significantly increase the deficit.
Finally, under pressure from the streets, the temporary social allowance, introduced in 2020 during the pandemic, was extended until 2024. It could even become permanent to alleviate the social distress resulting from an unemployment rate of more than 30%.
An unpredictable future
The economic outlook for the coming quarters is bleak. Power cuts will continue to dampen economic activity, and the South African economy could fall into recession.
No improvement is expected in the medium term. More financial resources must be needed to upgrade the electricity grid, which is an essential condition for reviving the economy. Decades of poor governance and widespread corruption have undermined the country’s economic foundations. It also ruined South Africa’s credibility with international investors.
The economic crisis accentuates the social turmoil, still latent in South Africa with substantial structural unemployment. The very great precariousness and the deepening of inequalities are burning the street. The situation often escapes the authorities with the blockade of roads, looting and attacks against foreigners, scapegoats of the crisis. These economic and social crises could be added to a new political crisis in 2024.
The ANC, which has been very dominant in the political landscape since the end of apartheid in 1994, may, for the first time, not have an absolute majority in Parliament after next year’s election. This perspective may encourage the Government to multiply tax gifts, weakening public finances. A radicalisation of political discourse to bring back disappointed supporters is also not to be excluded. This would further divert investors from South Africa.
With tomorrow's economic, social and probably political crisis, South African assets are to be avoided.
