EDITORIAL: It’s time to panic, quickly
Unless Eskom gets fixed, and fixed quickly, we almost needn’t bother with anything else because we are almost at a point of no return
“When it’s time to panic, panic quickly.” Market commentator, investor and popular Business Day TV host Simon Brown likes to remind us of this sage advice from his grandfather whenever there is bad news brewing about a specific company. Designed originally for share traders, the tip is equally applicable to all facets of life.
As we lurch from one crisis to the next, the question has to be asked: why does it take our government so long to start panicking? Why do we first need an unprecedented 40% of Eskom’s generating capacity offline before we realise there is apparently a shortage of engineers, or design problems with Medupi and Kusile, or the need for a proper investigation into what exactly is going on with these R300bn-and-counting monstrosities?
The time to start panicking over electricity supply in SA was 20 years ago. Quick action then could’ve saved us not only billions of rand in interest payments on eye-wateringly expensive, dysfunctional power stations, but also an untold number of jobs, billions in investment and countless hours in gridlocked traffic.
Standard Bank estimates that for every 5% of the load that is removed from the electricity grid, GDP growth can be reduced by 0.3 to 0.5 percentage points. With GDP growth of 0.7% in 2018, according to the most recent Reserve Bank estimate, we’re already a very long way from the 5.4% the government is targeting to cut unemployment and poverty.
Unless Eskom gets fixed, and fixed quickly, we almost needn’t bother with anything else. It therefore doesn’t help that Moody’s — the only ratings agency to still rate our government debt as investment grade — predicts supply will remain tight until at least the mid-2020s.
Cosatu, with its countrywide protests on Wednesday against job cuts and the proposed splitting of Eskom into three units, has shown that no reform will happen without a fight. A second protest is planned for February 19, the day before finance minister Tito Mboweni delivers his budget speech in parliament. Complicating all of this the looming elections.
Thanks to Eskom, the rand was the worst performer among emerging-market currencies on Wednesday, while yields on benchmark government bonds due in December 2026 have climbed 22 basis points in the past three days, to their highest level in three weeks. Bond yields move inversely to bond prices, and a higher yield reflects lower demand.
That’s not the only reason for sleepless nights. Data out this week showed manufacturing output increased a mere 0.1% year-on-year in December, falling significantly short of the growth of 1.4% expected by economists. These are alarming numbers from a sector that accounts for about 13% of GDP and is one of the country’s biggest employers.
Stats SA data released on Tuesday showed the unemployment rate remains near a 15-year high. While there was a slight quarter-on-quarter decline in the three months to end December 2018, from 27.5% to 27.1%, the jobs created were likely to be nothing more than temporary posts filled over the festive season.
Retail sales were even more disappointing, declining 1.4% year- -on-year in December, compared with market expectations of a 2.5% increase. The drop — the only year-on-year decline in 2018 — is partly explained by a shift in spending on Black Friday specials at the end of November, but it remains a concerning indicator of the financial health of the SA consumer.
Mboweni would do well to keep this in mind when he announces what are likely to be further tax increases and fuel levies in his budget next week. He is in an impossible situation, facing pressure to raise revenue and cut spending in an economy that can ill-afford either. The reality is that he’ll need to find billions to help prop up Eskom, which is simply too big to fail. Other parastatals have also demanded their pound of flesh, such as the SABC and SAA.
None of this will be liked by the ratings agencies, unless Mboweni can show clear progress was made on improving revenue collection and cutting spending since his medium-term budget policy statement in October.
So don’t let the smooth speeches and sudden jolts of action fool you. It’s time to panic.