Load-shedding crushes South African GDP

Absa Bank has cut its gross domestic product (GDP) forecast for the fourth quarter of 2022 to -0.5% due to intensified power cuts across the country.

Absa also projects a contraction for the first quarter of 2023. “For 2023 as a whole, the impact of power cuts on activity levels, business confidence, and private investment cuts our GDP forecast by 0.9pp to 0.7%.”

Consumers remained resilient in 2022 despite this negative outlook. However, for 2023, Absa halved its household consumption forecast from 0.8% to 0.4%.

The company also expects regular load-shedding to continue through 2024, at the least.

“The National Energy Crisis Committee’s roadmap for ending load-shedding aims to add up to 8,822MW of additional power supply in 2023 from various sources, but we expect it to achieve only about half of this.”

However, Absa predicts that inflation has reached its peak and should return to the target range by the second quarter of 2023. The company expects the inflation rate to average 5.5% in 2023.

“Base effects on fuel and food price inflation combined with modestly rising core CPI inflation should see headline CPI falling below 6% in May 2023 and sustainably return to the target mid-point by mid-2024.”

Absa is also not hopeful for the country’s exchange rate this year, forecasting a weaker rand at R18.00 to the US Dollar by the end of 2023. At the time of writing, the rand was trading at R18.00/USD.

This prediction is due to a combination of a weak global demand for South African products, a lift to imports from renewable energy capex, a weakening of the terms of trade, and South Africa’s ongoing deficit in invisible flows. These factors have resulted in the current account returning to a mild deficit.

As for the company’s repo rate predictions, Absa believes that the hiking cycle has “topped out.”

“After a cumulative 375bp hike since November 2021, we believe that easing inflation amid dissipating adverse price shocks will allow the MPC [Monetary Policy Committee] to keep the repo rate on hold.”

Absa forecasts two repo rate cuts of 25bp each in September and November of this year. 

“However, the environment remains highly uncertain, and we see risks of further tightening in the near-term and delayed easing if price pressures prove to be stubborn.”