/ 21 January 2023

Blackouts add to risk of recession

mining output recorded its 13th consecutive month of year-on-year declines in February, decreasing by 5%, according to data from Statistics South Africa (Stats SA). Photo: Supplied

South Africa’s growth outcomes during this year will be negatively affected by inflation, interest rate hikes and, in particular, load-shedding

The country’s nearly 16-year electricity crisis has deepened, with Eskom implementing intensive rolling blackouts up to stage six “until further notice” as the state-owned energy utility strives to avoid a total collapse of the power grid.

“Productive sectors such as manufacturing, construction and mining have already been impacted by load-shedding, we’ve seen this,” said Stanlib chief economist Kevin Lings, warning of the risk of a recession.

“This impact is more accentuated because there are other infrastructure problems, particularly rail linkage to the mining industry, road supply and just overall port capacity that are affected.”

Statistics South Africa (Stats SA) data this week showed that mining output fell 9% year-on-year in November, marking the 10th consecutive month of decline in production and following a 10.4% slump in October. The last time the mining sector recorded annual growth was in January last year. 

Erratic power supply, inflationary pressures, supply chain disruptions and the problems associated with illegal mining have continued to restrict production, Nedbank said in a note.

The 18.65% tariff increase that the National Energy Regulator of South Africa recently granted Eskom will see the mining industry’s electricity costs rise by R13.5 billion or 33.7% to R53.5 billion by the end of 2024, according to the Minerals Council South Africa.. 

From 2021 to 2024, electricity tariffs will have jumped 46%.

Electricity will make up about 12.5% of mining costs by the end of 2024 from about 9% now, the council said in a statement.

Lings said the mining and manufacturing sectors have been under pressure for some time with no relief in sight.

A recent Stats SA report showed that manufacturing production fell by 1.1% in November — during another period of record levels of load-shedding — compared with the same month the previous year. Manufacturing was a significant positive contributor to the 1.6% growth in GDP in the third quarter of 2022.

Investec chief economist Annabel Bishop said an economy cannot not function to its full potential with insufficient electricity supply. She noted that “load-shedding contributed to the decline in economic growth from above 5% year-on-year in 2008 to 0.1% year-on-year by 2019”.

Sanisha Packirisamy, an economist at Momentum Investments, said that the growth forecast for South Africa this year is about 1.1% and the chances of a recession are slim — although expansion will be limited.

A recession is a significant, widespread and prolonged downturn in economic activity, technically illustrated by two consecutive quarters of negative GDP growth. 

“An increase in fixed investment in the energy side should keep the GDP number in positive territory,” Packirisamy said. “We still have the expectation that we’ll get a little bit of employment coming through, real wage growth coming through and inflation will start coming off. But there are risks to the downside given the extent of load-shedding that we’ve seen.”

At the micro level, continuous power outages have forced many businesses to look for backup sources such as generators to keep operating, although many cannot afford this extra cost.

Business lobby group Sakeliga undertook a survey last June which found that out of 478 respondents, 67% used electricity generators and others used small uninterruptible power systems (UPS) and solar panels as the main ways to deal with load-shedding. 

Of the respondents, 64% were small businesses with 10 or fewer employees.

The survey found that the median business — with a turnover about R300 000 a month — spent close to R5 000 a month on electricity, plus an additional R5 000 to curb the harmful effects of the power cuts. This included spending on generators, UPS systems, solar systems and other solutions. 

The median business reported a loss of about R25 000 over three months because of electricity shortages. 

Many business associations are seeking relief from the government on behalf of their members, said Happy Khambule, the energy manager at Business Unity South Africa (Busa).

“From Busa’s perspective we’ve been working with the state to ensure that the primary instruments that will be used signal to society that these are the instruments that are available. For example, a wheeling framework needs to be in place for companies and businesses that want to wheel or use the national grid and distribution network,” Khambule said. 

Wheeling is the delivery of energy from a generator to an end user located in another area through the use of an existing distribution or transmission network.

He said some businesses are seeking relief from the government either through cost recovery in the form of a damage claim, a subsidy or some form of a rebate for companies and businesses to migrate from the national power grid.

“We are noting … the recent proposal by a number of companies and individuals as well as experts that there should be a civil claim against the state for not being able to deal with load-shedding,” Khambule said.

“It would be interesting to understand what the actual ramifications and remedies that are available are.”The department of small business development is working on an energy relief package to mitigate the effect of load-shedding, BusinessTech reported this week. The details of the package and the application criteria are not yet available.