Load shedding a risk to financial stability of SA – Reserve Bank

Load shedding is expected to detract 2% from gross domestic product (GDP) and add 0.5% to inflation this year. The Reserve Bank says the higher stages SA is currently experiencing is a growing risk to the financial stability of the country.

It poses an immediate risk to the efficient functioning of infrastructure, such as automated teller machines (ATMs) and cellular networks, which are crucial for the smooth functioning of the financial system.

Financial stability is a financial system resistant to systemic risks and shocks that can efficiently handle money, thereby bolstering confidence in the financial system and financial institutions, the South African Reserve Bank (Sarb) says in its latest Financial Stability Review.

The Sarb points out that South Africa experienced growing electricity supply shortages since 2008, while the frequency and extent of rolling blackouts increased exponentially over the past few years. The bank’s calculations show that after approximately 219 gigawatt hours (GWh) in 2018 and 1 326 GWh in 2019, a total of 1 701 GWh were shed in 2020, increasing to 2 558 GWh in 2021.

This increased significantly to 11 697 GWh shed for 2022 as a whole and so far, this year approximately 13 000 GWh have been shed, confirming that the first five months of 2023 have seen more GWh shed than in the entire 2022.

The average energy availability factor (EAF) for the year to 20 May is 52.8%, down from an average of 58.1% in 2022, 61.8% in 2021 and 65% in 2020.

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Detrimental effect on GDP

The higher stages of load shedding have become more commonplace and have a detrimental effect on business productivity as well as business and consumer confidence. The Sarb forecasts gross domestic product (GDP) growth of only 0.3% in 2023.

The central bank expects rolling blackouts to ease to 150 days in 2024, lowering GDP growth by 0.8 percentage points and 100 days in 2025, reducing GDP growth by 0.4 percentage points.

The severe stages of rolling blackouts could also be inflationary as higher operating costs due to running diesel generators are passed on to consumers and higher rates of wastage and spoilage, especially along food value chains, lead to possible goods shortages, the Sarb says.

Load shedding will also possibly affect other macroeconomic variables, such as sustained recovery in employment due to its contractionary effect on growth.

It will also continue to weigh on investor sentiment, in turn raising South Africa’s risk premium and placing pressure on the exchange rate.

The Sarb says there is growing evidence that households and businesses are investing in alternative energy sources to mitigate the effects of more severe rolling blackouts, but at the expense of other priorities.

Generator imports were at multi-year highs in 2022, while the first quarter of 2023 saw solar panel imports of around R3.2 billion, compared to approximately R1.4 billion during the first quarter of 2022.

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Households spend on alternative power

The Sarb says the transition of households to alternative energy sources is likely to widen the already skewed income and development distribution in South Africa, as mainly middle- to high-income households can afford to invest in alternative energy sources, while poorer households are largely without recourse.

Financial stability is not an end in itself but a precondition for balanced and sustainable economic growth, the bank says. Apart from affecting ATMs and cellular networks, more rolling blackouts also contribute directly to increased insurance claims and higher excess costs as outage-related claims from households and businesses mount, prompting an increasing number of insurers to exclude these claims from insurance policies.

The Sarb also points out that the revenue generated by electricity sales constitutes the bulk of municipal revenue for smaller and rural municipalities. While the transition to alternative energy sources should have long-term benefits for the economy, it will have a structural impact on the income base of municipalities, potentially placing further strain on the fiscus while further negatively impacting service delivery.

Electricity supply constraints can also cause goods shortages and become an active driver of medium-term inflation expectations, influencing underlying inflation dynamics, slowing the disinflationary process and possibly contributing to monetary policy and stricter financial conditions for longer.