Eskom power woes and recession risk keeps rand under the whip
Eskom’s woes took a toll on the rand, with SA’s currency leading its emerging-market counterparts lower after a report showing manufacturing production endured its longest slump since the global financial crisis highlighted the recession risk facing the economy.
As power cuts, which on Monday briefly moved to an unprecedented stage 6, stretched for a sixth day and the bulk of SA mines suspended work for a second shift, the rand dropped to multi-week lows against the dollar, euro and British pound on Tuesday.
The rand fell more than 1% against the dollar, with the next biggest loser among emerging markets tracked by Bloomberg falling 0.4%.
The rand fell to its weakest level since November 20 on Tuesday. On Wednesday morning, it remained under pressure, having fallen 0.19% to R14.80430/$. The rand was flat at R16.40790/€ and little changed at R19.42770/£.
Eskom said on Wednesday that stage 2 load-shedding would continue until shortly before midnight.
The 0.8% contraction in manufacturing during October compared with the same period in 2018 reflecting tough conditions faced by a sector that was struggling even before Eskom introduced rolling blackouts, which happened just days after Stats SA data showed a shock 0.6% decline in GDP during the third quarter.
Load-shedding has intensified doubts that the economy can reach the 0.5% expansion for 2019 forecast by the Treasury and the Reserve Bank, and that it might instead slip into a second recession in less than two years.
It reached the weakest level since November 1 against the pound, which was bolstered by polls showing the Conservatives on course for victory in Thursday’s UK elections.
“What is predominately driving the currency at the moment is SA factors,” said Michelle Wohlberg, a fixed-income specialist at RMB. “The fact we are having load-shedding will obviously make sure that growth does not even come close to where we need it to be and that is factored into the weak currency.”
Rand weakness, if it persists, may boost the price of imported goods such as oil, reducing the scope for the Reserve Bank, which has a 3%-6% inflation target, to support the economy with an interest-rate cut.
A recession induced by load-shedding may also increase the chances of SA losing its last remaining investment-grade rating, which may lead to capital outflows, further rand weakness and higher borrowing costs.
President Cyril Ramaphosa, who attracted criticism earlier in the week for praising Medupi, one of the over-budget and delayed power stations that are largely responsible for the financial and operational crises engulfing Eskom, cut short a trip to Egypt to “attend to urgent domestic priorities”, his office said on Tuesday.
While the contraction in manufacturing was at a slower pace than economists expected, with those surveyed by Bloomberg predicting a 2.7% drop, the declines were broad-based with seven out of 10 divisions contracting on an annual basis.
The month-on-month seasonally adjusted figure showed growth of 2.7%, after a drop of 2.4% in September.
The monthly number, though encouraging, has to be viewed against a wider trend that points to a sector that is “very weak”, said Standard Bank’s head of SA macroeconomic, fixed-income and currency research, Elna Moolman.
“In other words, a lot of volatility and noise but really not a pretty picture and of course this is before the severe load-shedding that we are seeing now,” she said.
Harmony Gold spokesperson Marian van der Walt talks to Business Day TV about the impact that load-shedding is having on the miner's operations.
A greater concern was the effect the current power cuts would have on the “hoped for” investment recovery into 2020, said Moolman.
Ramaphosa has committed to attracting R1.2-trillion in fixed investment in the coming five years, in a bid to boost growth and create jobs. But business confidence levels, an important precursor for investment, languished at close to record lows, as measured by the latest RMB/BER business confidence index.
Measures of manufacturing confidence suggest the sector is unlikely to see more upbeat activity during the fourth quarter. The most recent Absa purchasing managers’ index — a gauge of business conditions in the industry — fell in November to 47.7 points. A reading below 50 points indicates contraction.
“Manufacturers continue to face a myriad of challenges, with electricity supply disruptions and elevated administered prices weighing heavily on operational performance,” said Investec economist Lara Hodes in a note. - Additional reporting Allan Seccombe