Absa Bank, one of SA’s biggest financial institutions, is forecasting two quarters of negative growth — or a technical recession — citing heightened power cuts that it says will affect the country’s near-term growth prospects and place pressure on future tax revenue collection.
Absa’s downward revisions follow a warning by Moody’s Investors Service last week that SA’s longest-ever stretch of power cuts and concerns over its deteriorating economic growth outlook are “credit negative”.
The US-based ratings agency said the three-month state of disaster, announced by President Cyril Ramaphosa during his state of the nation address on Thursday that gives the government wide-ranging powers to manage the electricity crisis, has real and significant implementation risks, “which will, in any real effect, take time to materialise”.
The SA Revenue Service (Sars) also sounded the alarm that tax collection could fall as worsening power cuts and the country’s elevated cost of living combine to hollow out the tax base.
Citing load-shedding’s impact on growth, Absa chief economist Peter Worthington on Monday said the bank has cut its GDP forecast for the fourth quarter to -0.5% from 0.3% previously and is expecting a contraction in the first quarter of 2023.
He said for 2023 as a whole, it has slashed its GDP forecast by 0.9 percentage points from an expected 2.3% growth to a weak 0.7%, reflecting the effect of power cuts on economic activity, business confidence and private investment.
Absa’s GDP projections add to a cacophony of forecasts by a number of institutions.
Business Day reported previously that Nedbank and the Reserve Bank expect growth of 0.7% and 0.3%, respectively, for 2023, while Standard Bank and PwC have more optimistic estimates of 1.3% and 1.6%.
To explain the extreme differences in the projections, Standard Bank chief economist Goolam Ballim said higher growth projections for 2023 infused a “buffer for load-shedding by virtue of auxiliary systems in renewable energy being invested in by households and businesses”, while others included in their forecast a higher degree of load-shedding persistence.
PwC chief economist Lullu Krugel agreed, saying off-grid power solutions such as solar power or diesel generators used by the largest companies could be saving the rest of the country from an additional stage of load-shedding.
“For example, in 2022 the country imported more than R5bn worth of solar panels, up from around R4bn in the preceding year. We estimate that these panels provide an additional 2,000MW of generating capacity in 2023,” Krugel said.
But Worthington told Business Day Absa’s GDP estimates have also factored in self-generation. “We have factored it in. We have the average stage of load-shedding declining to an average of stage 4 in December [and] January to an average of stage 2 in the second half of this year. Some of that reduction is increasing recourse to self-generation, lowering demand on Eskom,” Worthington said.
He added that “of course, no-one knows how quickly or broadly self-generation will roll out, but many businesses, as opposed to households with rooftops, may not be able to self-generate”.
“There are a host of other issues. Even if you self-generate, what happens when load-shedding causes a water outage?” he said.
Rolling blackouts have not only affected the country’s potential growth, but has also blighted public finances. Worthington said that the consistent and high stages of load-shedding, together with softer commodity prices, is likely to weigh on tax collections in the financial year 2023/2024.
He said even though Absa is upbeat about the country’s current financial year’s fiscal performance, upside spending pressures and downside revenue risks are likely to manifest in 2023 and beyond.
Absa said that in the current financial year personal income tax receipts showed strong year-on-year growth over the past couple of months, and corporate income tax proceeds were strong in December. This is despite lower mineral production and prices, which offered hope for the other important company income tax months of February and March.
The bank added that the cumulative main budget deficit for April-December 2022 sits at R183bn, which is 16.4% smaller than the deficit in the same period of the financial year 2021/2022
“Factoring in the [roads utility] Sanral bailout, and assuming a small amount of the usual capex underspending, we now forecast a main budget deficit of R310bn this year, which would equate to 4.6% of GDP,” Worthington said.
“We see the risks to this forecast as lying in the direction of a slightly bigger deficit, but even then the outcome should compare well with the medium-term budget target of 4.9% and an original 2022 budget target of 6.0% of GDP.”
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