News in South Africa 8th March:

1. Recession looms:

South Africa is on the edge of recession after printing a much more larger than expected contraction in gross domestic product (GDP) on Tuesday (7 March).

Recession looms
Photo by Nicola Barts from Pexels

According to the figures published by Stats SA, the country’s economy declined by 1.3% in the fourth quarter of 2022 – three times larger than market consensus, which estimated a 0.4% drop.

The bad news for the country is that all indications are that the first quarter of 2023 will also be negative, which would put South Africa squarely in a technical recession – defined as two consecutive quarters of economic decline.

According to Citadel Chief Economist Maarten Ackerman, while various points of data in the GDP numbers tell a different story for different sectors of the economy, it’s crystal clear that load shedding was the cause of all the economic damage, exacerbating other entrenched issues in the economy.

“Everything indicates that the first quarter of 2023 will also be negative, because of the amount of load shedding we’re seeing at this point in time, coupled with the logistical issues faced in our rails and ports infrastructure,” he said.

“This will give us two consecutive negative quarters, which by definition is a technical recession.”

The economist noted that household consumption remained positive at 0.6%, despite a decline in the previous quarter. This shows that consumers are still maintaining some spending despite struggling with lower take-home pay, low savings, high unemployment and rising interest rates.

However, much of this spending was done on credit, which lines households – particularly middle-class households – up for debt problems along the way.

2. Rand slumps after Fed rate warning:

Stock markets tumbled, oil prices fell and the dollar firmed on Tuesday as Federal Reserve Chair Jerome Powell warned that the central bank could step up its rate hike campaign to fight inflation.

By Tuesday evening, the rand lost almost 2% to R18.56/$. Much weaker-than-expected growth data also weighed on the local currency.

Investors had been eagerly awaiting fresh signals about when the Fed might pause its rate-tightening cycle.

But Powell said in prepared remarks before two days of testimony in Congress that the central bank “would be prepared to increase the pace of rate hikes” following strong economic economic data.

The Fed and other central banks worldwide have been hiking rates in efforts to tame decades-high inflation, but the policy could also tip economies into recession.

“A big sigh of disappointment has rippled through stock markets as investors once again are jolted by the realisation that the work of the Federal Reserve, in trying to tame wild inflation in the US, is far from over,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

The Fed raised rates by 25 basis point last month after a half-point increase in December that followed a series of three-quarter hikes.

“We will stay the course until the job is done,” Powell said in the statement.

3. Load-shedding mitigation plan is failing:

On 22 January 2023, Eskom chair Mpho Makwana said they had embarked on a turnaround journey to improve plant performance and reduce load-shedding. This turnaround plan is failing.

When the new Eskom board was appointed, Public Enterprises Minister Pravin Gordhan gave it the mandate to increase the energy availability factor (EAF) to 75%.

EAF is a core performance metric or Eskom because it is directly linked to load-shedding. When the EAF declines, less power is available, which typically leads to load-shedding.

Eskom’s EAF has been declining for years because of poor maintenance at power stations and increased breakdowns.

Five weeks ago, Makwana said their plant performance recovery plan was at the final stages of approval.

“It will be driven vigorously, and an external project management company will assist the board in stress testing and monitoring the execution of this recovery plan,” he said.

The Eskom chairman cautioned that Eskom’s coal fleet recovery would not be achieved within the short term. “It will take at least two years to improve the EAF from the current 58% to 70%,” he said.

“The journey of the turnaround will see a stretch target EAF being driven toward 60% EAF by 31 March 2023, a mere ten weeks away, then 65% EAF by 31 March 2024 and 70% by 31 March 2025.”

He said the key levers to the success of the recovery of the Eskom fleet is fixing the systematic issues that are troubling the organisation.

4. More bank clients are financially distressed:

Nedbank says more customers have become financially distressed under the weight of the flagging South African economy, even as it delivered a strong set of full year profits on Tuesday.

The green bank reported its full-year results for the period through December 2022, in which earnings soared 20% to R14 billion as it benefitted from the endowment effect of higher interest rates and higher loans issued to clients.

During the period, the group’s impairment charges increased 13% to R7.3 billion, it said, largely due to a 7% rise in loans and advances, higher impairments in the home loans and vehicle financing divisions, and some clients in corporate portfolio migrating to Stage 3 loans, although provided for.

The bank defines Stage 3 loans as those where credit quality has declined.

Speaking in a post-results investor presentation, Nedbank CEO Mike Brown said distressed clients had clearly progressed, with the largest increases seen in the bank’s corporate lending business – Corporate and Investment Banking (CIB) – as well as the Retail and Business Banking (RBB) unit.

“Clearly, it’s those Stage 3 loans that would qualify as distressed, and you can see the progression of that. In 2019, it was around about 3.5%, 2020 [it was] 5.9%, 2021 it reduced to 5.1%, and it’s now sitting at just over 6%. And within that, the largest increase has been in CIB, that’s gone from just over 3% to just over 5%,” he said.

In the CIB unit, impairments decreased by 43% to R805 million, Nedbank said.

5. City of Tshwane is hunting for a new mayor:

The City of Tshwane will have to find yet another mayor after COPE’s Murunwa Makwarela was disqualified.

Makwarela failed to produce evidence that he is not an unrehabilitated insolvent, making him ineligible to hold office as a councillor.

The DA welcomed the decision but denied it had knowledge of him being sequestrated in 2016.

He previously served as a speaker for the council, with the matter never being brought up.

All information sourced from articles posted by: BusinessTech, Fin24, DailyInvestor, Moneyweb, and City Press.

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