News in South Africa 24th July:

1. Good week tainted by 2 industries:

South Africa had a great week on the economic front last week, with Stats SA reporting a significant drop in inflation, the Reserve Bank holding on interest rates and the rand ending stronger against the dollar.

Good week tainted by 2 industries
Drift of Harrachov Mine” by alarch is licensed under CC BY-SA 2.0.

However, economists at the Bureau for Economic Research have raised red flags around two key industries in South Africa’s economy: mining and agriculture.

In the group’s latest weekly review, the economists flagged data from the mining sector published last week amid all the good news – specifically profit warnings from some of the country’s biggest mining operations.

“A major local fiscal risk that we have cautioned about is materialising,” the BER said.

“This concerns weaker mining sector profits amid slumping SA export commodity prices and poor logistics infrastructure in South Africa.”

Anglo American Platinum (Amplats) and Kumba Iron Ore cautioned last week that profits in
the six months to end June 2023 could decline by 75% and 22%, respectively.

The economists also raised red flags over another development that could hit South Africa further down the line.

The non-renewal of the Black Sea grain deal that enabled shipments from Ukraine despite the ongoing war with Russia pushed global grain prices higher over the week.

“If sustained, this will also impact local grain costs,” it said.

The grain deal, a ban on the export of certain types of rice from India, and likely drier conditions in the grain-producing parts of South Africa in the upcoming summer months due to an expected El Niño weather system, all present “clear upside risks to a relatively favourable outlook for SA food prices“, the BER said.

Good news

Despite the worries over mining, the general outcome of last week’s slew of economic data and activity was positive for South Africa and offered some respite in what has been an incredibly trying 2023 so far.

Even on the GDP front, the South African Reserve Bank’s projections have picked up slightly, with the central bank anticipating 0.4% growth for the year, edging the country further away from recession.

While risks remain, the BER said that this view aligns with its own modelling, with an anticipated 0.4% growth print also expected for the second quarter of the year.

Inflation is also heading in the right direction.

According to Stats SA, the headline consumer inflation rate slowed to 5.4% y-o-y in June from 6.3% y-o-y in May – somewhat lower than the market consensus.

This gave the SARB’s Monetary Policy Committee (MPC) room to hold on interest rates – counter to many expectations.

“The decision was a close call, with three members voting for no change while two opted for a 25bps increase,” the BER noted.

“This marked a notable shift from the previous unanimous 50bps rate hike and a string of rate increases totalling 475bps since November 2021.”

The economists said the change in voting behaviour is particularly noteworthy because, on balance, the MPC remained wary of upside inflation risks, including drier weather adversely impacting local food prices, load-shedding-related costs, and higher-than-expected wage increases.

However, despite the risks, the SARB’s outlook suggests that inflation is on a downward path towards 4.5%

The central bank did warn, however, that the interest rate hike cycle isn’t over – it’s just paused – and that future hikes could come if inflation does not move in the right direction.

2. Trade at risk:

South Africa is putting half its trade with the world at risk because of its relations with Russia, with hundreds of thousands of jobs on the line. 

Head of agriculture at Nedbank commercial banking, John Hudson, told CNBC Africa that South Africa risks losing its trade with the United States and its allies due to its relations with Russia. 

The European Union and the United Kingdom would most likely follow the United States in imposing sanctions if the world’s premier superpower deemed it necessary. 

This would put 50% of South Africa’s global trade at risk, with the country’s agricultural sector hit particularly hard. 

South Africa exports 160 million cartons of fruit annually and is expected to grow to 260 million cartons in the near term. 

Roughly 10% of this goes to the United States, placing a significant amount of foreign exchange earnings at risk and local jobs as the sector is labour-intensive. 

Hudson expects South African farmers to find other markets to compensate for the export shortfall if the country were removed from the African Growth and Opportunity Act (AGOA).

Some of Nedbank’s agricultural clients plan to export to other regions as the uncertainty over access to the US market threatens their businesses. 

Even if sanctions are not applied, South Africa’s risk premium and cost of doing business in the country have already risen. 

This prohibits further investment from foreign companies and even prevents local companies from engaging in long-term investments. 

An increased risk premium will raise the country’s borrowing costs and negatively impact its ability to service its debt. 

Locally, clients will be unable to pay off their debt, said Hudson, which will put banks under pressure with rising amounts of bad debt on their books. 

The agricultural sector is particularly vulnerable to rising borrowing costs as it relies heavily on debt to fuel its growth. 

US and Africa trade expert Laird Treiber echoed Hudson’s comments, saying South Africa will lose thousands of jobs and export revenue. 

3. Koeberg a major concern:

After two reports and a site visit Minister of Electricity Kgosientsho Ramokgopa is still not satisfied with the answers he is getting from Eskom about the ever-slipping deadline for the completion of the life extension project of Unit 1 at Koeberg Nuclear Power Station.

Ramokgopa’s concern, which he repeatedly emphasised during his weekly update on the execution of the electricity crisis plan, is that a further outage slip – which he expects – will result in an overlap with the planned outage for a similar 20-year life extension project at Unit 2.

This would deprive the energy-starved national grid of a total of 1 840MW, which equates to almost two stages of load shedding.

Ramokgopa said he was “none the wiser” after a presentation Eskom staff gave him during his visit to Koeberg days ago. He said he is “not convinced” they are ready to return the unit to service when they promised and there is a real danger of overlapping with the outage on Unit 2.

“I remain extremely worried about the situation at Koeberg,” he said.

The situation is “extremely upsetting” due to the rand value and amount of generation capacity at stake and because missing deadlines repeatedly undermines confidence in the safety of the plant, that concerns some people, Ramokgopa said.

“My first impression is that Eskom does not have the internal capacity to manage the programme and the parties involved,” he said.

Ramokgopa said he has a good idea of what the problem is at Koeberg but cannot share his view yet. “I am worried and extremely upset.” He added that Eskom should have managed the project better and its lack of performance undermines confidence in Eskom’s ability to manage complex projects.

The minister said he is referring the matter to the Eskom board.

Asked if a forensic investigation is on the cards, he said that is for the board to decide.

“Where there are signs of failure in delivery of a major project like this, questions must be answered, whether through a forensic investigation or other means. If people have left or are leaving, they must be pursued.”

4. New load shedding record:

At the end of the 29th week of 2023, South Africa has been in complete darkness for the same amount of time as the last five years, combined.

According to the latest Power Availability Statistics, compiled by independent energy analyst Pieter Jordaan, the 21st of July marked the country’s 1,176th hour of blackouts – equivalent to 49 days, cumulatively.

This 49-day milestone is the same as the total blackout hours in 2022 (34 days), 2021 (7 days), 2020 (5 days) and 2019 (3 days).

The country is also on track to surpass another bleak milestone: when it has accumulated another four days’ worth of outages – all but guaranteed – South Africans will have spent more time in the dark than in the past ten years combined.

Making matters far worse, despite the alleviation in load shedding in the past month – particularly in June – the country is still projected to see a total of 88 days in complete darkness this year (~2112 hours in the dark).

While South Africans more commonly use total hours of load shedding to gauge how bad outages are in the country, Jordaan’s data looks at more impactful points like blackout hours and the Power Availability Ratio (PAR) of the grid.

The blackout hours represent the actual time the average South African spends in the dark – excluding the times that load shedding is ‘in effect’ but waiting around for it to hit.

As it stands, load shedding is in effect for 24 hours a day, but depending on the stage, South Africans will only experience actual blackouts ranging from two (stage 1) to 12 hours (at stage 6).

Put another way, while South Africa has experienced load shedding for 204 days in 2023 so far (totalling 4,330 hours), the total time in actual darkness is cumulatively 49 days, or 1,176 hours.

In effect, around 27% of the year so far has been with zero power.

5. South Africans are saving for food and funerals:

Despite food inflation slowing down, South Africans are still feeling the pinch.

According to research firm Eighty20 consumers are putting money away for rainy days but mainly for food and funerals.

It adds that people will not be able to manage additional financial shocks. 

“The main thing people are saving for is food which is a pretelling statement about the state of most people’s lives when one thing they are saving for is food,” he said.

“The next after that, which is quite a long way down is fuel costs, then school and education, and then sort of deposit on a house or improvements of the house so it’s only way down the list where you are getting into sort of an investment or the kind of savings that is going to reap a long term benefit other than an immediate benefit,” he said.

All information sourced from articles posted by: BusinessTech, DailyInvestor, Moneyweb, and ENCA.

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