This column was first published in Business Day
The past two weeks of data for October gave the impression something is seriously wrong with the economy.
The original assumption after load-shedding in the first quarter was that the economy would, thanks to the slow pace of reform, gradually recover through the second half of the year into 2020, but this is not happening.
Third-quarter GDP data this week looks set to post no quarterly growth and the fourth quarter is unlikely to be much better. Growth forecasts for next year will have to be revised down from 1.5% to closer to 1%.
Reforms occurring in the background are too slow to allow the economy to lift off. There is no driver — not sentiment, not external demand, not productivity, not investment (growth). On this latter point it is instructive how fast the spin around the investment conference a month ago died. Business knows that there is not an investment problem.
Lack of investment growth
There is a problem with investment growth as an emergent and organic process, not picking off individual projects on a stage.
The economy simply has no drivers here. Pumping in money the government does not have would not work, nor would rate cuts have any long-lasting effect. Growth is an emergent phenomena when the private sector has the sentiment to invest.
As ever there is no panic about this in most of the government, despite that it will mean still higher unemployment rates.
Electricity demand in this environment is down 1.5% year on year. This is why despite operations at Eskom stabilising at a weak pace, there is no load-shedding. Yet the system is exceptionally tight as Eskom keeps reminding everyone.
About 12GW of new capacity is required under the integrated resources plan (IRP) by 2025, while 2GW is needed now to plug the fact the system is being run too hard with a fleet that is too old. Yet nothing has happened in a month and a half. There is a long but simple regulatory process that must be undertaken that could have been done to unleash about R650bn of investment in renewables that is on standby (in equity and debt) to deliver the IRP’s requirements by 2025.
The economy simply cannot grow until there is new electricity capacity, or else there will be load-shedding. Growth is therefore capped not far above current levels for the time being. Yet the department of mineral resources & energy is being blocked by ideological blockages and inefficiencies. Why is the minister not held to account on this in cabinet?
The IRP was a classic case of the government being happy with what was published, but then is in no rush to do what matters next, which is provide ministerial determinations and rush through a concurrence process with the National Energy Regulator of SA (Nersa) on the emergency procurement and renewable energy independent power producer procurement round five.
The capping of growth by Eskom is exactly why an independent transmission system market operator is needed as quickly as possible, as well as reform to Nersa to open up a least-cost energy system. At the moment within the Eskom road map it will not be until the end of 2021 that a non-independent transmission system market operator will be complete albeit still under the Eskom umbrella. The independence part, if it comes, will be well after that.
Still, in the short term there is something amiss if the government does not realise that it can get “for free” R650bn of new investment simply by gazetting some pieces of paper. This is what the private sector can do. But time is running out for it to come on grid soon enough as the IRP lays out.
It should be noted that only in one year did SA manage to deliver about 1.5GW of new renewable capacity onto the grid and generally averaged about half that. Now double that is needed each year for the next 10 years. There is no time to waste. It is a free option.
Decisiveness wins credibility and with it growth.
With the electricity system and SAA a wider lens is needed, rather than a narrow view of supposed developmental state purpose. This is particularly true of SAA where unsustainable jobs are being maintained at the expense of more productive fiscal spending on basic services and infrastructure that would have a wider positive effect on the economy, not to mention the crowding out of sustainable private sector airline jobs. The same could be said of Eskom with its much larger bailouts.
SAA is at a moment where decisiveness can win markets, investors and ratings agencies through crystallising long never-ending bailouts into lower costs upfront. Pragmatism is finally showing through, forced by the Treasury and shocks to revenue which are rapidly intensifying.
This will be the narrative to watch in the coming days and the lessons to rapidly learn for electricity capacity and Eskom.
• Attard Montalto is head of Capital Markets Research at Intellidex.
