Eskom dealt the economy a potentially devastating blow when it started implementing its highest level of power cuts to date, increasing the chances of SA slipping into a second recession in less than two years.
The crisis-hit utility, which supplies about 95% of the country’s energy, moved to stage 6 load-shedding, which means cutting 6,000MW. This was after a technical problem at the long-delayed and over-budget Medupi power station.
President Cyril Ramaphosa, while acknowledging problems with the power station, on Monday described Medupi in his newsletter as “a fitting symbol of the importance of our SOEs”.
Ramaphosa said on Monday evening: “The ongoing load-shedding is devastating for the country. It is causing our economy great harm and disrupting the lives of citizens.”
SA’s mining companies shut their underground operations and processing plants on Monday night because of the unprecedented power cuts.
The latest news from Eskom came after five consecutive days of load-shedding, which ranged from stage 2 to 4.
The severity of the latest power cuts is also bad news for Ramaphosa. He is at risk of overseeing the second recession, defined as consecutive quarters of shrinking GDP, less than two years after he rose into office promising to boost the economy after nearly a decade of stagnation under Jacob Zuma.
The rand, which had gained as much as 0.3% earlier on Monday, lost about 0.7% from the levels on which it was immediately before Eskom’s announcement. By 7.03pm, it was 0.3% weaker at R14.67/$.
Single biggest risk
The new crisis at Eskom, the utility described by economists and ratings agencies as the single biggest risk for SA’s economy, follows a report last week that showed GDP declined 0.6% in the third quarter.
Even before the latest power cuts, economists were pessimistic about the outlook for the fourth quarter. SA last suffered a recession in the first half of 2018.
A weak economy, by reducing tax collection, makes it harder for the government to fix its finances. That in turn will raise the risk of the country losing its last remaining investment grade rating, from Moody’s Investors Service, potentially leading to outflows of as much as $8bn (R117bn), according to predictions by the SA Reserve Bank.
“Our worry would be that you have a fourth quarter decline of GDP and you go into recession, even if it is a technical recession,” said Stanlib chief economist Kevin Lings.
Early indications of economic activity in the fourth quarter of the year have been quite weak and December is critical for retailers, he said.
It is also a very important period for tax revenue through VAT, Lings said.
Citibank economist Gina Schoeman said the economy needs to grow at 0.8% in the fourth quarter to achieve the 0.5% growth for 2019, forecast by the Treasury and the Bank.
“It’s quite easy to get rid of 0.8% quarter-on-quarter, and depending on how long this load-shedding goes on for, depending on its actual impact, it’s certainly a risk” that the 0.8% growth rate will not materialise.
Petra Diamonds, one of SA’s largest sources of the precious stones, said it has stopped all its mines and hoisted underground workers to the surface.
Impala Platinum, the world’s third-largest platinum miner, and Harmony Gold both said they have stopped their night shifts because of the cuts.
“It’s very serious. We are not able to produce. What we lose today we can never catch up. If you lose a production shift it’s gone for good,” said Implats spokesperson Johan Theron.
“No mine in SA is able to operate or have production at this level of power,” he said, noting that mines have to pay salaries despite losing production. If the load-shedding schedule remains above stage 4, then Implats will prevent 25,000 people from going underground on Tuesday.
If the power shortage lasts for another seven to 10 days ahead of the Christmas and year-end break of 10 days then the consequences for underground mines are severe, as they would need a protracted start-up period to retrain and reinduct thousands of employees, while making underground working areas safe, Theron said.
Eskom said on Monday load-shedding was a responsible act and a highly controlled process implemented to protect the country from a national blackout. The latest cuts came just two weeks after Eskom said at the release of its interim results that it had no plans to implement load-shedding as long as unplanned outages could be limited to 9,500MW.
At 9.25am on Monday, Eskom moved from stage 2 to stage 4, in response to unplanned breakdowns of 14,200MW paired with 600MW in higher power demand.
Eskom on Monday evening downgraded load-shedding from an unprecedented stage 6 back to stage 4. In a social media post, the utility said that stage 4 would last from 10pm on Monday to 11pm on Tuesday.
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