It’s no secret that state-owned enterprise (SOE) Eskom is facing a number of challenges. However, it seems that these woes are far greater than we thought, and as South Africa approaches winter, the threat of cold, dark days are becoming all too real.
ESKOM’S UPHILL BATTLE
The question of electricity has become one of the most pressing issues facing the South African economy and its recovery. South Africans have become accustomed to power outages, but it is important as a nation not to ignore or become desensitised to the mounting economic toll of load shedding. Our local economic recovery and growth prospects depend on sustainable electricity being placed at the top of the agenda.
Over the past few years, and specifically the past two state of the nation addresses and subsequent budget speeches, Eskom has thus featured as a key agenda point, particularly with reference to the transmission development plan. But even as it literally struggles to keep the lights on, its financial results revealed that it suffered a net loss of over R20 billion in the year to the end of March 2020.
Eskom CEO Andre de Ruyter this week then warned South Africans yet again that while load shedding will eventually lessen, it will not disappear entirely. Speaking at a “state of the system” briefing, de Ruyter painted a rather sombre picture of the state of Eskom, with financial issues just one of many challenges plaguing the beleaguered SOE. Other notable battles include:
- The state capture scandal:
Eskom is right in the middle of the state capture inquiry, as millions of taxpayer rands have ended up in “below the table” transactions. It has now come to light that seemingly ignoring the opinion of a legal review conducted by law firm Cliffe Dekker Hofmeyr (CDH), the Eskom board authorised a further payment of R176m to Trillian and R348m to McKinsey.
- A lack of foresight:
It seems that while power generation plants have been slowly crumbling away, few initiatives have been implemented to ensure sustainable supply by means of upgrades or new (effective) power station developments. Eskom now faces the burden of power stations that are reaching the end of their lifespan, making them at best unreliable and unpredictable.
- Defective new plants:
What was meant to be the saving grace for the electricity supply in SA has now become yet another expensive lesson. The defects detected at both Medupi and Kusile require in the realm of R7 billion to correct.
- Debt, debt and debt:
Eskom, in keeping with the South African fiscus and other SOEs, is facing a tremendous amount of debt, with really no way to eliminate its debt bill. The electricity supplier’s debt has ballooned to a jaw-dropping R464 billion, and the interest on its debt alone equated to a jaw-dropping R39.1 billion in the previous financial year. Government stepped in, providing a bailout of R56 billion in 2020/21 and R31.7 billion for 2021/22, but South Africans continue to find themselves sitting in the dark.
And unfortunately, Eskom has warned that it expects load shedding to increase towards the end of the year, as the SOE is facing a 4000MW shortfall that is expected to continue for at least another five years.
FED MAINTAINS DOVISH STANCE
The US Federal Reserve indicated on Thursday that it was in no hurry to increase interest rates, as mounting fears of higher inflation swept through the market a mere two weeks ago. Fed Chairman Jerome Powell kept to the dovish stance that markets have become accustomed to, despite signs that the anticipated V-shape recovery may not be as unrealistic as initially thought.
The Fed now expects the US economy to gain 6.5% this year – the largest annual bounce in GDP since 1984, and an enormous 2.3% higher than its projection just three months ago. Inflation is now expected to exceed the Fed’s 2% target to reach 2.4% this year, although Fed officials believe that it will move back to around 2% in subsequent years, thus allowing the central bank to keep interest rates at current low levels.
The Fed’s so-called “dot plots” put policymakers’ median projection of interest rates at zero percent in 2023, even though seven of 18 officials now expect higher rates in 2023, compared to five in December.
Following the address, the dollar index dropped 0.5% to hit its lowest levels in two weeks, and last stood at 91.400. Additionally, the 10-year US Treasury yield gyrated wildly before settling around 1.648%, having hit a 13-month high just before the Fed’s announcement.
Meanwhile, the Bank of England (BoE) also moved to keep interest rates steady at 0.1%, noting that there are signs of an economic recovery following Brexit and the COVID-19 pandemic that together have seen the UK face quite a bit of economic uphill.
Earlier this week, Bank of England governor Andrew Bailey said that the UK economy would contract by 4% in the first quarter from the same period last year, and by 19% compared to the first three months of 2019. He further noted that inflation would remain below the 2% target, but would rise temporarily due to public support measures.
The European Central Bank (ECB) President, Christine Lagarde, noted that the ECB might need some time before the recently agreed acceleration in the pace of bond purchases. These remarks came after the bank’s decision last week to increase the pace of money-printing to bring yields down and support the Eurozone’s economic recovery.
Globally, market participants welcomed news that the World Health Organisation (WHO) considered the benefits of the AstraZeneca virus vaccine to outweigh its risks, and its recommendations that vaccinations continue.
Taking a look at currency moves, the euro traded around $1.19, hovering near an over three-month low of $1.184. Pound sterling fell to $1.395 on Thursday afternoon, after reaching a three-year high of $1.41 in late February.
Locally, the South African rand remained range-bound at R14.70 against the greenback on Thursday, its highest level on a closing basis since 24 February. The rand’s strengthening was boosted by the Fed’s positive outlook on economic growth and its pledge to keep interest rates near zero for years to come.
Meanwhile, China’s coronavirus vaccine manufacturer Sinovac Biotech said that it would be able to supply South Africa with five million doses of its COVID-19 vaccine “within weeks”. However, local regulators have yet to approve it for use.
Taking a look at some of the data released this week:
|Forecast or ∆%
|Retail Sales MoM FEB
|Industrial Production YoY FEB
|Manufacturing Production YoY FEB
|Housing Starts MoM FEB
|Fed Interest Rate Decision
|Initial Jobless Claims 13/MAR
|Inflation Rate YoY Final FEB
|Wage Growth YoY Q4
|Industrial Production YoY JAN-FEB
|Retail Sales YoY JAN-FEB
|Unemployment Rate JAN-FEB
|Retail Sales YoY JAN
|Consumer Confidence Q1
|Building Permits YoY JAN
|Manufacturing Production YoY JAN
On the domestic front, more strike action is anticipated after Saftu said that workers must prepare to mobilize and join students in their protest action for free education in the country.
Eskom and load shedding is also top of the agenda as we look towards South Africa’s economic recovery, and as we await feedback from ratings agencies.
Thus far, we have seen no impact on the rand from these actions.
The rand remains volatile, despite trading stronger following the dovish stance by the Fed. A range of R14.67 to R15.90/$ is intact for the time being. We do, however, continue to monitor US Treasury yields, as a rise could push the rand back above the R15.00/$ threshold.
The rand started the day trading at R14.76/$, R17.58/€ and R20.52/£.