/ 9 March 2023

S&P downgrades SA’s outlook as load-shedding weighs on growth

Load Shedding Jhb
Partially lit office buildings on the city skyline during a loadshedding power outage period, in Johannesburg, South Africa. (Leon Sadiki/Bloomberg via Getty Images)

In a new setback in South Africa’s efforts to claw back investment grade, ratings agency S&P Global revised the country’s outlook from positive to stable late on Wednesday. This is as the country’s energy crisis continues to weigh on economic growth.

Just under a year ago, in May 2022, S&P lifted South Africa’s outlook to positive, citing the country’s improved fiscal trajectory as well as government’s structural reform efforts. 

But South Africa’s economic conditions have deteriorated markedly since then, with Eskom’s failures representing a significant risk to growth, which has also been dampened by the ratcheting up of interest rates. Tighter monetary conditions have also added to the rand’s weakness, which saw the local currency breaching R18.50 to the dollar this week.

According to S&P, South Africa’s economic growth is under increased pressure as a result of infrastructure constraints, particularly severe electricity shortages. Moreover, reforms to address the country’s infrastructure woes and to improve governance and performance at state-owned enterprises have been slow, also weighing on growth. 

In response to the ratings action, the treasury noted that the government is taking urgent measures to reduce load-shedding in the short term and to transform the energy sector through market reforms. 

Last month, Finance Minister Enoch Godongwana announced in his budget speech that government had proposed a R254 billion debt relief plan for Eskom. 

The debt takeover — which comes with a number of conditions, including restricting Eskom’s ability to invest in power generation — is expected to free up the utility’s balance sheet so that it may return to financial stability. Eskom has amassed over R400 billion in debt, which has hamstrung its ability to maintain its ageing coal fleet, feeding into 15 years of load-shedding.

The treasury said other reforms are underway to improve performance in the transport sector, in particular freight rail. “In addition, fiscal consolidation measures have positioned the public finances to absorb a portion of Eskom debt, maintain support for the economy and the most vulnerable, and make budget additions to fight crime and corruption.”

Data released this week gave credence to the view that South Africa may be headed for another technical recession. The country’s economic growth contracted by a deeper-than-expected 1.3% in the last months of 2023, likely the result of the severe load-shedding during the quarter.

In January, the South African Reserve Bank gave a dire prognosis of the health of the country’s energy crisis-hit economy, forecasting GDP growth of just 0.3% in 2023. The bank estimated that load-shedding could shave as much as two percentage points from growth this year.

The Reserve Bank’s medium-term expectations weren’t much better, with the economy forecast to expand by 0.7% in 2024 (down from 1.4%) and by 1% in 2025 (down from 1.5%).

The treasury was slightly more bullish on growth, forecasting in the budget that GDP would expand by a still-meagre 1.4% over the medium term. According to the treasury’s forecasts, South Africa’s economy is expected to grow by 0.9% 2023 and will recover slowly to 1.8% by 2025.

“This rate of economic expansion,” the budget noted, “is well below the pace required to generate significant employment growth and support national development.”