Business, batten down the hatches – but don’t lose hope

It’s only the second month of 2023, and so far it has been a challenging start.

State-owned enterprise Eskom has implemented load shedding at unprecedented levels, as it tries to get its energy availability factor (EAF) back to levels above 70%, with reports placing it as low as 58% in January 2023.

The International Monetary Fund has indicated that it expects global growth to fall to 2.9% in 2023 – a lower growth rate, but at least a higher forecasted number than the one it released in October last year.

A slowing world economy does not bode well for a country dependent on export growth to combat a current account deficit (measured by the South African Reserve Bank at 0.3% for the third quarter of 2022, down from 1.6% in Q2). Not to forget the looming possibility of being greylisted and placed under more scrutiny from global money laundering and terrorist financing watchdog the Financial Action Task Force.

Against this backdrop, South African businesses have to find ways to operate today and make strategic decisions for tomorrow – and their executives have to navigate their fears.

The worry at the top of the list is the possibility of state collapse, according to the World Economic Forum’s Global Risk Report for 2023, released recently. The only other countries in the world where this was ranked as the number one fear are Bosnia and Herzegovina and Peru.

Isaac Matshego, senior economist at Nedbank, does not believe a collapse is imminent.

“I acknowledge the concerns in that survey because they reflect justified unease about the failures in service delivery that we are currently seeing,” he says. “The likelihood of state collapse, however, is quite low.”

Matshego states that the Eskom power generation and supply crisis has magnified basic infrastructure delivery failures to a national level.

“In this environment those companies and businesses not involved with backup power supply solutions or renewable energy are unlikely to expand. You cannot plan to increase production when there is no guarantee that you will have the electricity to power that expansion.”

The impact of the crisis on potential economic growth is already dire. The South African Reserve Bank, in its latest Monetary Policy Committee press conference, said the rolling power cuts could wipe two percentage points off SA’s economic growth this year, with the bank expecting only 0.3% growth in gross domestic product (GDP).

Nedbank is slightly more optimistic, says Matshego, with a forecast of 0.7% growth in GDP.

“Come 2024 we believe an average of around 1.3% growth in GDP will be maintained for the next three years.”

Proven resilience, but tough times ahead

“South African companies have proven to be incredibly resilient,” says Matshego. “Throughout the shocks of the last decade, including the global impact of the Russia-Ukraine war, we’ve seen local corporates just continue to operate at reasonably efficient levels.”

This does not mean the macroeconomic context won’t have an impact on earnings and growth however.

Export companies should prepare for weaker markets that are only to a limited degree offset by the exchange rate.

Matshego says Nedbank is predicting that the rand will trade in a narrow band between R16.50 and R17.20 against the US dollar, but acknowledges that the local currency can very quickly deviate from its short- to medium-term ranges.

This is often not determined by local factors that can be controlled through national economic policy. Rather, external global events tend to influence emerging market sentiment.

A rand that trades in this range will not necessarily boost export earnings, especially not if the volumes are down.

The most daunting challenge for companies that sell to local and international markets is energy stability. In this regard, Matshego predicts that the grid will be stabilised by end of 2023, but that the country won’t reach a point where generative capacity and demand are closer to each other to negate load shedding before the end of 2025.

“The next three years will be significantly different from what we’ve known,” he says.

The private sector is currently investing in and implementing alternative plans for power generation, with Matshego predicting a lot of private sector-generated renewable electricity being sold back into the grid in the upcoming years.

To this extent, in December, Minister of Mineral Resources and Energy Gwede Mantashe announced that an additional 13 projects have concluded legal agreements under the fifth bid window of the Renewable Energy Independent Power Producer Procurement Programme (Reippp Bid Window 5). He also announced the five preferred bidders appointed for Bid Window 6.

The Bid Window 5 projects will bring 1 759 megawatts (MW) of renewable capacity to the national grid. It’s still not enough, though: the Council for Scientific and Industrial Research recently said the outlook for 2023 shows Eskom having a shortage of 2 100MW or higher, for 49 out of the 52 weeks.

Interest rates and inflation – what’s next?

According to Matshego the cost of capital in South Africa will remain as high as it currently is until at least March next year. That is when Nedbank’s Group Economic Unit forecasts the first interest rate cut.

“We expect local inflation to be below 5% in the second half of this year, but the Reserve Bank will in all likelihood remain cautious until inflation has dipped close to 4.5%,” he says.

Brought to you by Nedbank Commercial Banking.

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