So winter is almost over and you haven’t had any load-shedding? And you think that means thing are going well? Think again. The fact that there’s no load-shedding should worry you a great deal. It doesn’t mean Eskom’s power stations have been fixed. Quite the contrary. It means the economy is in much worse shape than we all think. This is why.
When Eskom implemented stage 4 load-shedding in March, it did so because it could only meet about 80% of the demand for power. But that bout of load- shedding started on a Sunday, a summer day, when demand is at its lowest. Of its 45,000MW installed generation capacity, Eskom had only about 28,000MW available to meet demand of 32,000MW, due to the breakdown of equipment and a shortage of parts.
So Eskom and the public enterprises minister said they’d pull out all the stops to fix broken generators and ensure there would be no load-shedding during the winter. But did they? And could they? The answer is a firm no. How do we know that? There are at least three reasons why Eskom is far from fighting fit.
First, Stats SA told us in June that the economy, as measured by GDP, shrank 3.2% year on year in the quarter ended March. Of course, one could argue that the load-shedding for most of March was the cause of the recession. The record R20bn-plus loss Eskom will report in two weeks shows how bad it is.
What the absence of load-shedding shows is that the economy is in much more serious trouble than we thought
Second, Stats SA also told us in June that electricity production has declined every month since November 2018. That culminated in load-shedding for the better part of November and December, prompting public enterprises minister Pravin Gordhan to cancel all leave for essential staff and senior management at Eskom for the year-end holiday. Did it help? No.
Third, Stats SA showed us again this month that the volume of electricity produced in SA in May declined, again, when compared with the corresponding month in the previous year.
In a nutshell, Eskom continues to produce less electricity every month than it did the previous year. For the whole of 2018, it produced 231,472MW of power — up from 229,331MW the previous year, but down from the 233,631MW produced in 2014. That’s five years ago! Then factor in the population growth that’s overshadowed economic growth for 10 years.
So when Stats SA releases its GDP numbers for the second quarter, it will show the economy has shrunk again. That means SA will have fallen into a recession, again. I estimate a contraction of more than 1.4%.
Of course, you need electricity to power a growing economy. So what the absence of load-shedding this winter shows is that the economy is in much more serious trouble than we have cared to note.
Darkness ahead
As bad news begets bad news, it’s likely ratings agency Moody’s will finally run out of excuses and accept that the SA economy is junk. All our other economic statistics point to the market’s acceptance of that reality. Look at the price of our banking shares, with an average p:e of 11.59, against the all share index’s 17.94.
The all share is weighted towards stocks such as Naspers, Sasol and BHP, whose revenue is mainly generated from outside SA, and thus in currencies other than our own. The banks mainly trade in this country, and to an extent, on this continent.
So, once another recession is confirmed, you can expect Moody’s to bring forward its ratings decision from November. And, among others, you can thank Eskom, and the government, for that bad news. Then you can go about finding shares that may benefit from a recession and junk status, starting with heavy hitters like Naspers and Sasol. At least these home-grown giants will continue to shine a torch in the dark.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.