/ 12 January 2023

South Africa’s economy hangs in the balance as energy crisis persists

Budget Speech Godongwana Kieswetter City Hall Dh 6207
Finance Minister Enoch Godongwana said ending blackouts is at the top of the government’s priorities as the country grapples with tough economic conditions. (David Harrison, M&G)

South Africa can have good policy on paper, but it is useless if the country’s crime and electricity crises persist, Finance Minister Enoch Godongwana told the South African delegates attending the World Economic Forum meeting in Davos next week. 

Many countries are battling strong economic headwinds, which the International Monetary Fund expects will drive a third of the global economy into a recession this year.

“The three biggest economies — China, the EU and the US — are all slowing down simultaneously,” Godongwana noted on Thursday. “This comes as the war in Ukraine is still ongoing, food and energy prices are rising, higher interest rates and the spread of Covid-19 in China is weighing on the global economy.”

The South African economy has not been spared this onslaught, and the country’s energy crisis continues to worsen already tough economic conditions. 

“On the local front, the last few years have been challenging,” Godongwana said. “Economic growth has hovered at very low levels, and business confidence and investment have been subdued. Economic activity has also been disrupted by a significant increase in the frequency and intensity of load-shedding.”

On Wednesday, Eskom announced that the country would endure stage six load-shedding until further notice. This is after 11 of the utility’s generators broke down on Tuesday morning.

Load-shedding stands to shave 0.6 percentage points off South Africa’s GDP in 2023, the South African Reserve Bank warned in November last year.

According to Godongwana, the effect of the Covid-19 pandemic on employment and investment — both of which remain well below pre-pandemic levels — is expected to weigh on growth over the medium term.

The treasury projects that real GDP growth will average 1.7% from 2022 to 2025, which is downwardly revised from the 1.8% forecast in the 2022 budget.

At this year’s budget speech, set to take place next month, Godongwana is expected to give further details regarding the government’s plan to relieve Eskom of a portion of its R400 billion debt. 

In his medium-term budget policy statement, Godongwana indicated that the government would take over one to two thirds of the utility’s debt, although a number of considerations still need to be made to pin down the exact quantum of the debt takeover. 

One thing the government will need to consider is the National Energy Regulator of South Africa’s electricity tariff decision, due to be announced later on Thursday.

The document outlining the South African delegation’s key messages at Davos notes that intensifying power cuts are compromising a fragile and recovering economy, which warrants the urgent implementation of energy sector reforms.

“The debt takeover, once finalised, together with other reforms will ensure that Eskom is financially sustainable. The programme will allow Eskom to focus on plant performance and capital investment and ensure that it no longer relies on government bailouts,” the document reads.

“Importantly, the programme will include strict conditions required of Eskom and other stakeholders before and during the debt transfer.”

The document further notes that during the 2022-23 financial year, the treasury will publish a framework outlining the criteria for government funding of state-owned companies. 

“To reduce their demands on limited public resources, state-owned companies need to develop and implement sustainable turnaround plans that align with their mandates, incorporate long-term structural considerations in their sectors and identify appropriate funding models.”

The presidential state-owned enterprises council, the document notes, is developing

a new approach to the government’s management of these entities. Some will be retained, while others may be disposed of or consolidated. 

“The future of state-owned companies will be informed by the value they create and whether they can be run in a sustainable manner.”

The government is well aware of Eskom’s problems, Godongwana said in his address.

“An unstable electricity supply remains one of the biggest barriers to economic growth and it disturbs the lives of all South Africans. In addition, the inefficiencies in the logistics sector, as well as criminal activity, are serious obstacles to growth and doing business and must receive our urgent attention.”

Ending blackouts, the minister added, is at the top of the government’s priority list. “We are committed to aggressively implementing new and existing measures to reduce the frequency and severity of load-shedding, and ultimately ending it.”