Load shedding, Transnet cut 2023 SA growth outlook – Absa

Load shedding is cutting the 2023 South African growth outlook after gross domestic product likely contracted in the fourth quarter of 2022 due to Eskom and Transnet. Sharply escalated load shedding at Eskom and logistical constraints at Transnet caused the near-term growth outlook to slump.

According to Absa’s Quarterly Perspective for the first quarter of 2023, it has cut its gross domestic product (GDP) forecast for the fourth quarter of 2022 to -0.5% quarter on quarter and also projects a contraction for the first quarter in its growth outlook.

“For 2023 as a whole, the impact of power cuts on activity levels, business confidence and private investment cuts our GDP forecast by 0.9pp to 0.7%. The consumer has proven surprisingly resilient in 2022 despite headwinds, but for 2023 we halve our household consumption forecast from 0.8% to 0.4%,” Peter Worthington, senior economist at Absa CIB, says.

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Economy pretty resilient in 2022

Although the economy proved pretty resilient in 2022, with a much stronger-than-expected third quarter GDP rebound of 1.6% compared to the previous quarter, load shedding escalated sharply further since then as breakdowns of Eskom’s generating plants increased, taking the energy availability factor below 50% at times.

Stats SA’s high frequency activity data to November was mixed, Worthington says.

“Mining and manufacturing production look set to subtract from growth in the fourth quarter, while freight payloads have also been on a downward trend since mid-2022, exacerbated by the Transnet force majeures in October and November.”

However, average retailing and wholesaling volumes were up in the period from October to November, compared to the third quarter.

“We believe that December, with its extreme load shedding, is likely to be negative across the board when the activity data is published this month.”

Absa lowered its GDP forecast for the fourth quarter to -0.5% from 0.3% growth previously, while the South African Reserve Bank disclosed that it now expects zero growth it its growth outlook.

“We expect regular load shedding through to the end of 2024 at least. The National Energy Crisis Committee’s roadmap for ending load shedding aims to add up to 8822MW of additional power supply in 2023 from a variety of sources, but we expect it to achieve only about half of this,” Worthington says.

“It will be hard to lift the performance of Eskom’s existing plants and new power supply takes time to procure and construct. Other structural reform progress remains slow and patchy, although government recently added four new important reforms to Operation Vulindlela’s to-do list.”

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Has inflation peaked?

Absa believes that inflation has peaked and should return to the target range by the second quarter. “Base effects on fuel and food price inflation, combined with modestly rising core CPI inflation should see headline CPI falling below 6% in May 2023 and sustainably return to the target mid-point by mid-2024.”

He says against a backdrop of China’s reopening, oil prices remain an upside risk for the forecast inflation trajectory, while business’s expenditure on back-up diesel generation in the face of intense load shedding is a cost-push upside risk. Absa forecasts CPI inflation to an average of 5.5% this year.

Worthington also pointed out that the current account has returned to a mild deficit due to weak global demand for South Africa’s exports, a lift to imports from renewable energy capex and a weakening of the terms of trade, combined with South Africa’s ongoing deficit in invisible flows. Against a backdrop of still muted risk appetite, Absa now forecasts a weaker rand at 18.00 USDZAR by the end of the year.

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Outlook for interest rates

About the other big point of interest for consumers, interest rates, Worthington says Absa believes the hiking cycle has now topped out.

“After a cumulative 375 basis points hike since November 2021, we believe that easing inflation amid dissipating adverse price shocks will allow the MPC to keep the repo rate on hold. We have pencilled in two rate cuts of 25 basis points each in September and November.”

However, he warns, the environment remains highly uncertain and Absa sees risks of further tightening in the near-term and/or delayed easing if price pressures prove to be stubborn.

Good news is that fiscal performance has been robust with good personal and corporate income tax collections and Worthington says Absa now forecasts a main budget deficit this year of 4.6% of GDP, within the MTBPS target of 4.9%.

“We doubt a full Eskom debt deal will be unveiled at the Budget. Given the small contingency reserve for the next financial year, we expect the deficit to widen to 5.1% of GDP, given downside revenue risks and upside spending pressures, including public sector wage talks, SOC bailout demands and government’s promise of a load shedding relief package for households and businesses.”

He says political risk has also abated somewhat with the re-election of President Ramaphosa at the ANC’s national conference, along with a strong balance of allies, but the ANC risks losing its majority in general elections according to polls next year, with uncertain consequences for political stability and governance.