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Load-shedding raises risk of another South African recession

9th December 2019

By: Bloomberg

  

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South Africa’s flagging economy could face a second recession in as many years due to a new wave of nationwide power cuts.

Eskom Holdings, the State-owned power utility seen by Goldman Sachs Group as the biggest threat to the country’s economy, started a fifth day of rolling blackouts on Monday due to further losses of generating capacity at its plants. While the power cuts are implemented to prevent a collapse of the electricity grid, they have a debilitating effect on the economy by curtailing mining activity and factory output and causing crippling traffic delays.

The latest round of so-called load-shedding started two days after the statistics office announced that gross domestic product shrank an annualised 0.6% in the three months through September. Power cuts already hit the economy in the first quarter, when it contracted the most in a decade, lead by a drop in manufacturing, mining and agriculture output.

“As it is, the fourth quarter was going to be flat but now there’s a growing chance that it could be negative,” said Elize Kruger, a senior economist at NKC African Economics.

The one thing that could prevent GDP from dipping as deep as it did in the first quarter is the fact that many businesses are winding down as the Christmas holidays approach.

December is the “least damaging time to have load-shedding” because the economy is geared more toward the services industry, with construction work and factory activity set to slow for the holiday break, said Dawie Roodt, chief economist at the Efficient Group.

Mining companies say they are probably bearing the full brunt of load-shedding because they are among the heaviest users of electricity.

The world’s biggest platinum-group metals producers prioritise electricity allocation to underground mines and ensure workers’ safety while reducing power to smelters. Still, production may suffer as companies stockpile ore for processing later when there is sufficient power, Jana Marais, spokesperson for Anglo American Platinum, said. Cutting power to smelters also adds to costs because the plants are designed to run continuously, she said.

Sibanye Gold, the country’s biggest private employer, has to reduce power use by 20% during load-shedding, said spokesperson James Wellsted.

“It’s concerning and if it continues for a long time it will impact on production and the entire industry, not to mention the economy,” Wellsted said.

Weak economic growth could lead to a further deterioration in public finances and heighten the risk of South Africa losing its last investment-grade credit rating with Moody’s Investors Service. The company cut the outlook of the nation’s Baa3 assessments to negative last month.

Edited by Bloomberg

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