Sacci warns that economy will face serious implications due to ongoing electricity supply shortages.

Yesterday, the SA Chamber of Commerce and Industry (Sacci) issued a warning about the serious economic implications resulting from ongoing electricity supply shortages. These shortages are damaging business confidence and deterring foreign investors. Fitch Ratings agency has also stated that the power crisis is the most severe aspect of South Africa’s current economic difficulties.

Business confidence in South Africa declined from an over seven-year high in January due to the worsening power crisis, after experiencing strong momentum at the end of 2022.

Sacci reported that the Business Confidence Index (BCI) decreased by 4.4 index points, dropping from 117.3 in December to 112.9 in January. The BCI had not reached a level higher than 117.3 since October 2015. The annual average of 109.6 in 2022 exceeded the pre-Covid level of 107.0 of 2019, as well as the improved 2021 level of 108.5.

However, Eskom implemented various stages of load shedding throughout January due to an uncontrollable number of unplanned breakdowns at its coal-fired power station, which caused adverse effects. The country now estimates that it will experience at least 250 days of load shedding in 2023, up from the previously forecasted 100, following 157 power cuts in 2022.

The availability of energy, particularly electricity, is crucial for the functioning of the economy and production processes. Historical data from Sacci showed that real gross domestic product (GDP) growth began to level off in 2008 when Eskom announced its first load shedding and electricity supply declined.

Sacci stated, “It is most evident that consistent electricity supply is a critically important input in the economy – with causality that runs both ways. Before 2008, real GDP growth and electricity demand moved in tandem.

After 2008, it appears that GDP per unit of electricity increased with the economy becoming more energy-efficient. From 2018 onwards, however, GDP growth became subdued, indicating that the efficiency gains of the earlier period may have receded.

It also implies that the severity of load shedding, notably at its present levels, has a stark direct adverse impact on real GDP growth and the functioning of the economy.” Sacci noted that the shortage of supply also caused tariffs to rise, impacting price elasticity of demand and local authorities’ income.

Sacci economist Richard Downing highlighted that the energy supply had a direct and severe negative effect on business confidence in January, and although the lower cost of fuel provided some relief, it remained relatively high. Downing expressed concern that the lagged effect of electricity load shedding was a significant issue for other sectors of the economy and business confidence.

Downing said, “The advantages of attracting foreign trade and direct foreign investments might speedily dwindle if the energy crisis is not addressed in a meaningful way.” Fitch’s head of Africa sovereign ratings, Jan Friederich, stated that the declaration of the National State of Disaster on Eskom provided some headroom to absorb the temporary impact on economic metrics from load shedding, but a failure to address the problem over the medium term could add to the downward pressure on the rating.

Friederich said South Africa’s low growth potential remained a key credit weakness and that it could eventually weigh on the sovereign rating should infrastructure problems cause a further decline in potential growth. Friederich noted, “When we affirmed South Africa’s rating at ‘BB-’ with a Stable Outlook in November 2022, we assumed that power shortages would not significantly improve in 2023 and would ease only gradually in 2024.

The further deterioration of electricity supply goes beyond our base case and presents downside risks to our forecast from December that economic growth will average 1.1% in 2023.”