Manufacturers Suffer as Load Shedding Continues Unabated

South Africa’s ongoing load shedding woes have continued to wreak havoc on the country’s business confidence in the first quarter of 2023. The RMB/BER Business Confidence Index (BCI), released recently, recorded a decline from 38 in the fourth quarter to 36 in the first quarter of 2023. This decline is a consequence of load shedding, which has led to numerous setbacks in various sectors, especially in the manufacturing sector.

Manufacturing confidence, in particular, was adversely affected, plummeting by 9 points to 17 in the first quarter. This low level is a rare occurrence, highlighting the manufacturing sector’s struggles with the combined impact of intense load-shedding and dilapidated logistics infrastructure. It also means that virtually all manufacturers represented in the index are at risk, which is negative for job creation and continued employment, as well as the operations’ ability to survive.

Retail confidence also fell sharply from 42 to 34, indicating the prevalence of weak business conditions across the board. In contrast, the confidence of building contractors only declined marginally from 46 to 43. However, if sub-contractors, particularly electricians, were considered, confidence and activity in the overall building sector rose significantly, thanks largely to the installation of backup power.

While the manufacturing sector typically provides better-paid jobs than the retail, wholesale, and vehicle sales sectors, these three industries are also showing weak business conditions. The overall outlook is a severely negative outcome for South Africa, with the high risk of further deindustrialization in the future.

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The weakening of the rand against the dollar is yet another consequence of load shedding. The rand recently hit a three-year low against the dollar, trading at R18.51 at 5 pm, 9 cents weaker than the previous day at the same time. According to Sanisha Packirisamy, an economist at Momentum Investments, the rand is trading much weaker than its fair value of R17.50. Recent comments from the US Federal Reserve’s Jerome Powell regarding the hiking cycle’s possible extension and interest rates peaking at a higher level have weakened the rand, along with lingering recession risks in the global economy.

South African-specific issues have also contributed to the rand’s decline. The country’s greylisting and lingering political risks in the run-up to the 2024 national elections have raised concerns about foreign bond and equity flows into South Africa. The recent Cabinet reshuffle has resulted in a number of underperforming ministers retaining their positions in key portfolios that are pivotal to the country’s economic trajectory. Moreover, the legal cases against President Cyril Ramaphosa have raised concerns about his early departure before the 2024 elections.

In conclusion, load shedding has had severe consequences for South Africa’s business confidence and overall economic growth. The government needs to take proactive measures to address the challenges affecting the manufacturing sector, improve the power grid’s stability and capacity, invest in energy-efficient technologies, and diversify energy sources. The government must also address the concerns of foreign investors and implement policies that encourage capital inflows and job creation.

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