Transnet, Eskom crises cause SA economy to miss the boat

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JEREMY MAGGS: Now, Transnet’s new chief executive officer (Michelle Phillips), has described the Durban port crisis as a case of Rome burning. This weekend, the country was also plunged into another bout of Stage 6 load shedding that is said to be costing the country something in the region of R900 million a day. Obviously, the impact is dire.

I want to get a view now from Investec chief economist Annabel Bishop. Annabel, let’s start with the consequences of a return to Stage 6.

ANNABEL BISHOP: So we’ve seen Stage 6 load shedding really only for two days, obviously Friday and Saturday of the past weekend. But our electricity minister (Kgosientsho Ramokgopa) has actually warned that Stage 6 load shedding can cost the country up to R1 billion a day. So, ja, it’s quite worrying, Jeremy, and of course, Stage 6 load shedding in 2022, he reminds us, resulted in over 620 000 people losing their jobs. Projections are that these numbers will go up to 830 000. So it’s a huge worry.

Read: Load shedding: Who to believe?

But I think we need to unpack where it came from and obviously, that was due to lower diesel availability for the open-cycle gas turbines, the diesel generators which South Africa uses in times of crisis when our electricity demand exceeds supply. And, of course, they also made some usage of the pumped storage, which of course is the hydro electrics that we have coming from Lesotho.

But essentially, it did cause volatility in the rand. The rand breached 19 to the US dollar on Friday as a consequence of this. We even saw some foreign net selling of South African government bonds.

So there was quite a substantial amount of outage and of course, we had five generating units go off in 24 hours. So it seems like it’s been a temporary crisis, the Stage 6, that’s been resolved by the delivery of diesel.

Our minister as well said that over the next three months, we’re going to get an additional 3 200 megawatts coming online. So this Stage 6 is not persistent. We saw Sunday with Stage 4 and then Monday with Stage 3 [Eskom moved back to Stage 4 at 12pm on Monday]. We do have some up-and-down momentum in the electricity situation as we eventually move towards resolving it.

This weekend was obviously very unfortunate, especially the impact on the rand.

But looking forward into next year, we do anticipate that we should eventually move to less of these types of incidents of load shedding that we saw the past weekend.

JEREMY MAGGS: And Annabel, add to that the ongoing crisis at the Durban port, and you have a real sentiment issue here, don’t we?

ANNABEL BISHOP: Yes, and that’s exactly right, Jeremy. It comes on the back of a grave concern about this huge container crisis, which now of course our Transnet government officials have said that could last out until February next year. No one really wants to hear that. It’s a huge negative impact both domestically for manufacturers and of course vehicle imports as well is a big problem.

That Durban harbour obviously also exports bulk commodities, but it brings in motor vehicles, and it’s obviously very damaging for the economy. The bottom line is that if you look at Bloomberg’s basket of currencies, emerging market currencies, we’ve seen the majority of these strengthen on dollar weakness in the anticipation that obviously we’ve reached the end of the US interest rate hike cycle, that we’re going to see interest rate cuts next year in the US.

Read:
Durban port congestion headache
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But Bloomberg points out that really South Africa’s actually been left behind here. It’s missed out on the biggest rally for this asset class, emerging markets, since January. Not just the load shedding but also, of course, as well South Africa’s populist policies, we’ve seen the NHI (National Health Insurance) make progress through the different bodies it needs to go through to get passed and, of course, now it went through the National Council of Provinces recently. It’s on its way to being signed into law by the president and obviously government.

Read:
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So all of these factors are obviously creating negativity for foreign investors. We only have the elections next year, likely in April or May, and of course, support for the ANC is expected to wane, which will reduce the seats in parliament and make it more difficult for it to pass these types of very populous left-wing policies. But again, it’s also an erosion to sentiment.

JEREMY MAGGS: The challenge of course is to have a stronger and more robust response from government. Do you think that is happening?

ANNABEL BISHOP: There is a lot of talk about increasing the access for the private sector. There are problems, as we know, with the transmission lines in South Africa, electricity being taken from where it’s generated to around the country, mainly in the east of the country and obviously a lot of renewables in the west. So those structural issues need to be overcome.

Obviously, support at the top with government to bring in the private sector, both in terms of energy generation and transmission for electricity and, of course, in the operation of the ports, bringing in the private sector as well, or should we say sections of the ports, and bringing in the private sector as well for rail lines.

All of those factors are very well supported. The feedback’s been that the problems really come from lower down the chain in terms of implementation.

Private sector investors often running into regulatory hurdles or slow turnaround from civil servants in terms of needing to get necessary clearance on certain issues.

So I don’t think it’s a smooth path yet and I think government actually needs to do a lot more to facilitate private sector involvement and investment in these two key areas, power and freight in South Africa.

JEREMY MAGGS: And if you look at both of these crises then in the short term, no good news for growth.

ANNABEL BISHOP: The short term is right, and the short term often can be less than a year. So I would say certainly the next few months, but I would say in the second half of next year there’s expectation that we’re going to see an improvement in electricity supply perhaps even in the second quarter. Obviously, the quicker we can clear the backlog at the Durban port as well, that’s extremely important.

There have been obviously concerns about the ageing infrastructure at the Durban port, the Durban harbour not able to get ships through in and out quickly. Even these large roll-on/roll-off ships that come with big containers, sometimes even deciding not to stop at the Durban harbour because it just becomes too difficult, the waiting time. So all of these are really negative factors that South Africa needs to turn around.

So I think you’re quite right in identifying certainly for the next six to eight months that South Africa should continue to see many of these issues.

But of course, the minister says that we’re getting another 3 200 megawatts of electricity supply coming online, that’s capacity, then obviously that will be helpful. It’s not enough to eradicate load shedding and, therefore, not enough to actually boost investor sentiment because what investors obviously want is they want free market dynamics in South Africa.

They want a lot more private sector participation, provision and supply of electricity but also of course distribution and the same for the ports as well.

South Africa needs to see a privately owned port operated by the private sector and our rails need to be boosted as well.

So sadly, Jeremy, short term it’s a negative prognosis and I think it’s reflected in the currency as well. Longer term hopefully we start to see some repair and some quickening of a resolution to some of the issues that still continue to hold it back.

JEREMY MAGGS: Annabel Bishop, I’m going to leave it there, chief economist at Investec, appreciate the sentiment.