South Africa’s economy further derailed by Eskom in 2019, but new developments in energy policy could reduce Eskom’s negative impact
Summary and Assumptions
• South Africa’s growth: The last decade was very challenging for the South African economy in a myriad of ways, including growth. The mismanaged economy, along with the resultant insipid growth, lead to a deterioration of South Africa’s macroeconomic fundamentals. What’s more, both the supply side and demand side of the economy point to limited recovery of GDP growth momentum during the fourth quarter of 2019, and we expect GDP growth for 2019 as a whole to come in even lower than 2018’s growth and to record only 0.4%.
• Energy: Eskom has played a major role in crippling the South African economy as its supply of electricity has often failed to meet the country’s demands, while at the same time it has bled government finances. Nonetheless, there have been new developments in electricity policy, and these changes have the potential to alleviate some of the burden that has been placed on the South African economy by Eskom’s rolling electricity cuts in the medium term. These are the possible creation of a new power generation entity separate from Eskom, as well as government permitting mining companies to produce energy for own use.
• Investment: Gross fixed capital formation somewhat showed signs of recovery in 2019, while President Ramaphosa’s second investment drive was seen as a success. Even so, the country needs much more investment in order to exit its current growth slump, and for this to happen, there needs to be a marked improvement in confidence.
• Unemployment: Following a new high of 29% in the second quarter of 2019, South Africa’s unemployment rate rose even higher and reached 29.1% during the third quarter, and the country’s alarming unemployment rate is likely to worsen further until the economy starts growing meaningfully.
• Interest rates: The South African Reserve Bank cut the benchmark interest rate by another 25 basis points in January 2020, following the 25 bps cut of July 2019. We do not expect the Bank to cut rates during the Monetary Policy Committee’s (MPC) forthcoming meeting from March 17th – 19th as this will be before Moody’s next scheduled assessment of SA’s sovereign credit on March 27th.
• Fiscus: Budget 2020 presentation will take place on Feb. 26th, and is expected to paint a picture of a fiscus that has deteriorated further, relative to Budget 2019.
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