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Abu Dhabi, UAEWednesday 24 April 2019

South Africa's power crisis may push its economy into recession

Businesses in the only industrialised economy in Africa have to endure eight hours or more of power outages a day

Hulda de Villiers, a graphic designer, has to work with the use of a candle after another power cut in her suburb of Johannesburg. South African economy is reeling under the pressure of power blackouts. EPA
Hulda de Villiers, a graphic designer, has to work with the use of a candle after another power cut in her suburb of Johannesburg. South African economy is reeling under the pressure of power blackouts. EPA

South Africans are hunkering down for extended power blackouts as economists say electricity cuts may push Africa’s only industrialised economy back into recession.

State electricity utility Eskom has introduced "load shedding", or planned electricity outages countrywide, as ageing power plants suffer breakdowns. Consumers and businesses must now endure at least eight hours of no electricity a day, with some reporting longer blackouts.

“I’m in despair,” said Henry Nel, who runs a small computer-aided design company that provides draughting services to architects. He employs three staff members, all of whom spent most of last week doing nothing as they waited for the power to come back on. “I still have to pay them, even though we did almost no work. For the first time in 25 years I’m losing hope in this country’s future.”

Mr Nel’s story is one of many unfolding in South Africa, and rampant power outages could soon plunge the country into a recession again. Up to 0.9 percentage points could be cut from annual growth of South Africa, Goldman Sachs analysts said in a note last week. In February, the country's national treasury estimated gross domestic product to expand by 1.7 per cent in 2019.

Depending on the severity of the outages, the total loss to the economy could rack up to 4 billion rand (Dh1.01bn) a day, according to an estimate by energy analyst Chris Yelland.

Should the cuts persist, “GDP growth will likely be negative and it will be a question of how negative", said Michael Jacks, head of equity research at Bank of America Merrill Lynch in Johannesburg. “Definitely there is a risk of recession.’’

Manufacturing is the largest contributor to South Africa's GDP at nearly 14 per cent, according to Stats SA, the state data organisation. Mining adds more than 8 per cent and agriculture around 2 per cent. All these sectors depend on reliable electricity, which have propelled South Africa in pole position in terms of industrial activity in Africa.

The impact is now widespread. Johannesburg Water, the utility that provides the city with its water supply, put out an alert Thursday that its reserves were under pressure due to prolonged inactivity of pumps. The dead are also not spared, complaints appeared on social media about crematoriums across the country falling behind on services.

Many commercial entities do have backup generators, but running these for extended periods of time also has its risks and add to the costs of running the business. Poultry farmer Wessels Oosthuisen said he fears constant use will lead to breakdowns, with catastrophic consequences for his flock. “My concern is that if a generator goes down, I lose 175,000 chickens because of lack of climate control.”

Nelson Mandela University recently informed its students that it is struggling to keep 21 generators spread across seven campuses filled with diesel. The administration is spending 55,000 rand a day on fuel alone.

Even the South African President Cyril Ramaphosa found himself stranded by load shedding. On Tuesday, he took a metro train from outside Pretoria, as part of his election campaign ahead of the national vote in two months's time. The departure was delayed by two hours and he remained stuck in the carriage for another hour midway through the journey due to an outage.

There is little sign of a respite anytime soon. Pravin Gordhan, Minister for Public Enterprises, whose department oversees Eskom said the utility was working on its maintenance backlog. “We’ll get it right in a year or two, it will take a bit of time.”

The South African currency has so far held ground at about 14.22 to the dollar, largely supported by the dovish stance of the US Federal Reserve to hold interest rates steady. The Johannesburg Stock Exchange has also held steady, but it remains to be seen if that will be the case in near future.

“The Eskom crisis probably means we are in a recession already,” said Magnus Heystek, director of Brenthurst Wealth Management in Johannesburg. “The rand is also likely to remain under pressure. Our fund managers will probably say investors shouldn’t panic and remain invested. My advice: get out of the Johannesburg Stock Market. This is the time to panic.”

Updated: March 24, 2019 09:55 AM

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