This is how load shedding battered the Rand to record lows

The impact of loadshedding on the Rand is becoming more evident as the higher stages continue to keep South Africans literally in the dark, with the currency sliding to over 18 dollars each.

Last week started with stage 6 load shedding, which was only lowered to stage 4 by the weekend, with the latest announcement being that stage 3 (ramping up to stage 4 during evening peaks) will be implemented until Thursday this week.

According to the data for Eskom’s energy availability factor (EAF), which refers to the percentage of installed capacity available to the grid at a point in time, up to the week ending 16 September, the week before last was already the worst on record for the EAF.

The Bureau for Economic Research (BER) at Stellenbosch University says this is likely to have worsened even further last week.

“While Stats SA will only release the high-frequency activity data for September in the first half of November, the extent of the current loadshedding would not only have weighed directly on electricity generation, which forms part of the GDP calculation, but also on sectors such as mining, manufacturing and agriculture that are heavy users of electricity.”

All this detracts from the expected recovery in quarterly gross domestic product (GDP) during the third quarter after the 0.7% contraction in the second quarter. Referring to the Sarb’s interest rate decision, the BER says these short-term GDP growth concerns were outweighed by upside risks to the inflation outlook.

“The sustained weaker Rand is one of the more important risks. Despite the 75 basis points policy rate hike and the fact that two monetary policy committee (MPC) members preferred a 100 basis points move, the local currency lost further ground last week.”

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Also a strong dollar story for the Rand

However, the BER says while sustained stage 5 loadshedding may provide part of the explanation, this is rather a strong dollar story, as the US central bank (Fed) signalled last week that further (aggressive) policy rate hikes are likely in the rest of the year.

“The fast rising global short- and long-term interest rates come at a time when the outlook for our current account balance is worsening. The bottom line is that there is little to suggest that the Rand’s fortunes against the dollar will improve anytime soon.”

The BER points out that unless we, for example, see a sharp further decline in the oil price, sustained Rand weakness sets us up for another Sarb policy rate hike of at least 50 basis points at the November interest rate meeting, taking the repo rate to 6.75%, close to the Sarb’s current estimate of where the rate should settle over time to achieve their 4.5% inflation target. Therefore, the BER believes we are not far from reaching a peak in the policy rate.

Perhaps the only bit of positive news on the domestic economic front was the belated contract signing of three out of 25 preferred bidders’ projects that are part of bid window 5 of the Independent Power Producer Programme (IPPP), the BER says.

“Once completed in late 2024, the projects will add 420 megawatts of renewable energy to the grid. The total cost of these projects is estimated at R11 billion. It remains unclear how many of the other projects will reach the final contract-signing stage.

“Having said that, at the signing ceremony on Thursday, the head of the IPP office said that they are aiming to sign the contracts with the remaining 22 bidders by the end of October. If achieved, this will be a major step towards assisting to alleviate our power woes within a few years. It will also mean that we can be more comfortable to assume increased private sector fixed investment from 2022 onwards, driven by green energy investments.”