President Cyril Ramaphosa’s investment drive, which helped boost foreign direct investment to a five-year high in 2018, could be derailed by power cuts threatening to push the economy into another recession, according to two of the world’s biggest investment banks.
"The mood compared to last year is depressed," Michael Jacks, head of equity research at Bank of America Merrill Lynch, said on Wednesday, referring to participants at the bank’s annual investor conference held at Sun City. About 40% of the 159 participants were foreign, he said.
"No-one is expecting a rapid recovery in the economy whereas the year before, we were wrapped up in Ramaphoria. Load-shedding is a big concern."
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Goldman Sachs said load-shedding could subtract 0.3 percentage points of economic growth in the first quarter, and if it remained as severe as it is now, at stage four, which involves the removal of 4,000MW in long and regular blackouts, it could cut it by close to a full percentage point.
Load-shedding is implemented when demand exceeds supply in order to prevent a total collapse of the power grid.
The return of power cuts that have closed businesses for hours at a time had economists rushing to downgrade their growth forecasts for 2019, with the potential that a failure to meet the government’s 1.5% prediction will result in a further deterioration in the country’s fiscal position. That will heighten concern that SA will lose its last remaining investment-grade rating, from Moody’s Investors Service, resulting in capital outflows as SA gets kicked out from international bond indices.
It also overshadowed the release of data in the Reserve Bank’s Quarterly Bulletin that showed foreign direct investment (FDI) more than doubled in 2018, rising to R70.7bn, from R26.8bn in 2017. SA had sharp declines in FDI, investment in businesses that tends to be of a more long-term nature than putting money in capital markets, through the second half of Jacob Zuma’s presidency, when state capture and corruption accelerated. The last time FDI was this high was in 2013 when it reached a record high of R80.1bn. In 2018, Ramaphosa said he aimed to attract $100bn by 2023.
Higher inflows, which were driven by small- to medium transactions, could be attributed to a more positive investor environment in 2018, the Bank’s balance of payments unit head Piet Swart said. However, this could be reversed as load-shedding persisted.
"Investors are asking, if Eskom can’t solve its problem, then why invest at all," Merrill Lynch’s Jacks said. If load-shedding continued at current levels throughout 2019, the economy could shrink, he said "and it will be a question of how negative".
"If the current intensity of load-shedding were to persist in 2019, it could subtract up to 0.9 percentage points from annual growth," Goldman analysts wrote in a note to clients.
Merrill Lynch forecasts growth of 1.3% for 2019, while the Bank expects 1.7%, a far cry from the 3% Ramaphosa
pledged for 2018.
"The risks to growth are to the downside depending on Eskom," Merrill Lynch investment strategist John Morris said. "Sentiment is poor at the moment." Of the investors polled by Merrill Lynch, 92% expected growth to be below 1% in 2019.
Signs of a deterioration in investment sentiment became apparent in the fourth quarter
of 2018 already, when it dropped to the lowest level in a year. With Reuters
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