The SA Chamber of Commerce and Industry (Sacci) yesterday warned that the ongoing electricity supply shortages would have serious implications for the economy as it hampers confidence and spooks foreign investors.
This comes as Fitch Ratings agency also said that the power crisis was the most acute aspect of South Africa’s current economic difficulties.
Business confidence in South Africa fell from an over seven-year high in January mainly due to the adverse effects of the worsening power crisis, after gaining strong momentum towards the end of 2022.
Sacci yesterday said that the Business Confidence Index (BCI) dipped by 4.4 index points, sinking to 112.9 in January from 117.3 in December.
It was October 2015 when the BCI last recorded a level higher than the 117.3 of December 2022.
Sacci said the annual average of 109.6 in 2022 also surpassed the pre-Covid level of 107.0 of 2019 as well as the improved 2021 level of 108.5.
But in January, things took a turn for the worse as Eskom implemented various stages of load shedding throughout the month due to an uncontrollable number of unplanned breakdowns at its coal-fired power station.
The country now estimates at least 250 days of load shedding in 2023, up from 100 previously forecast, following 157 of power cuts in 2022.
The availability of energy, specifically electricity, is of critical importance for the functionality of the economy and production processes.
Historical data from Sacci showed that real gross domestic product (GDP) growth started to level off in 2008 when the first load shedding was announced by Eskom as electricity supply declined.
“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,” Sacci said.
“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 functioning of the economy.”
Sacci said the shortage of supply also had an effect on prices causing tariffs to rise and impacting on price elasticity of demand and less income for local authorities.
Sacci economist Richard Downing said that energy supply had a direct and severe negative effect on business confidence in January although the lower cost of fuel provided some relief but remained relatively high.
Downing said the lagged effect of the electricity load shedding was of major concern for other sectors of the economy and business confidence.
“The advantages of attracting foreign trade and direct foreign investments might speedily dwindle if the energy crisis is not addressed in a meaningful way,” Downing said.
“The immediate needs of improving Eskom’s current capacity constraints and restoring its full generating capabilities should receive urgent attention.”
Meanwhile, Fitch’s head of Africa sovereign ratings, Jan Friederich, said the declaration of the National State of Disaster on Eskom offered some headroom to absorb a temporary impact on economic metrics from load shedding, but a failure to address the problem over the medium term could add to downward pressure on the rating.
Friederich said South Africa’s low growth potential remained a key credit weakness, and that could eventually weigh on the sovereign rating should infrastructure problems cause a further decline in potential growth.
“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.”
BUSINESS REPORT