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In the medium term, the pace of South Africa’s recovery will be affected not only by weak demand, but also by more structural problems, says the South African Reserve Bank (SARB).
In a report on Tuesday (October 6), the SARB said that two areas stand out: the electricity shortage and the country’s fiscal situation.
South Africa has suffered periodic power outages since 2007. While these appeared to decline after the 2009 crisis, this effect was achieved through weaker-than-expected economic growth, coupled with a strategy of “keeping the lights on at all costs” , which succeeded in postponing maintenance and thereby increasing the fragility of the system, the SARB said.
Charge shedding resumed in 2015 and has persisted ever since, as 2020 has become the worst year in terms of total gigawatt-hour shedding, beating the 2019 record on August 13.
“Although electricity demand collapsed under the initial lockdown, and some capacity was opportunistically taken offline for maintenance, the increase in unplanned maintenance lasted less than a month, peaking at an additional 10% of the generation capacity.
Load shedding resumed on July 10 due to unplanned outages caused by breakdowns, and Eskom continues to warn that the electricity shortage will persist until 2021.
These power outages will disrupt economic activity and discourage new investment, the SARB said.
“Forecasts suggest that GDP is still around 20% below where it was at this time last year, and yet electricity use has essentially returned to pre-crisis volumes.
“However, the electricity-intensive manufacturing and mining sectors have returned to March production levels, helping to explain the resurgence in electricity demand.”
Tax problems
The fiscal situation is a second threat to the economy, in several dimensions, said the SARB.
Over the past decade, South Africa has added more debt, relative to GDP, than any of the top 20 emerging markets except Argentina, he said.
Forecasts indicate that South Africa will also increase debt in more than any of these countries over the next two years, although forecasts for Argentina are not available.
“While the 2009 starting point for debt was low, less than 30% of GDP, a decade of debt accumulation has brought that number to 63.5% as of 2019/20, which will likely become 81 , 8% this year, pushing South Africa well above the overall emerging market average of 63.1% according to the IMF.
“While efforts were made to contain this debt growth, these initiatives relied more on tax increases than spending cuts, with minimal contributions from reform initiatives.”
Meanwhile, high debt levels are likely to affect the recovery through various channels, the central bank said.
“These include effects of confidence and uncertainty, since the sustainability of the debt is in doubt, as well as the displacement through high long-term interest rates, a lower credit rating of the country and reduced access to external savings.
“The main supports for growth are historically low short-term interest rates and ample opportunities for structural reforms.”
Read: South Africa’s tax base is shrinking
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