By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Electricity sector progress and the economic impact
Following significant electricity shortages that hampered economic activity last year, the economy has experienced a notable reprieve. Since late March 2024, there has been no load-shedding. While caution remains regarding grid stability, especially with demand and production activity being subdued, this development underscores the positive impact of infrastructure maintenance as well as recent reforms, aligning with our view that load-shedding intensity peaked in 2023.
The South African Reserve Bank (SARB) estimates that load-shedding shaved off 1.5 percentage points (ppts) from GDP in 2023. However, this drag is expected to reduce to around 0.2ppts this year, 0.1 next year, and 0 by 2026, reflecting significant easing of energy constraints. In this report we delve into electricity data trends to highlight tangible progress in the energy sector.
Recent developments
On Thursday, Stats SA published electricity production data for June 2024, revealing a 5.4% y/y expansion and a 2.1% quarterly increase between 1Q24 and 2Q24. In the first half of 2024, electricity production grew by 3.6%, a stark contrast to the 7.3% decline over the same period in 2023 and the 2.5% decline in 2022.
Eskom's energy availability factor (EAF) has averaged around 60% since the start of the year and has surpassed 70% in the last two weeks of July - the highest since July 2020, when the pandemic restricted economic activity. With Eskom's nominal generation capacity at approximately 46 680 MW, this translates to around 33 000 MW of available generation, a substantial improvement from the 16 480 MW available in April 2023. The early return of Kusile Units 1, 2, and 3 last year, along with the successful commercial operation of Kusile Unit 5 in late June, has been pivotal in boosting available generation.
Key factors and reforms
Ongoing energy reforms, a R254 billion debt relief package for Eskom from the National Treasury, and the establishment of crucial structures such as the National Energy Crisis Committee (NECC), Operation Vulindlela (OV), and the Ministry of Energy and Electricity, have been instrumental in this turnaround. According to OV estimates, interventions such as the complete removal of the licensing threshold for embedded generation have enabled approximately R400 billion in new investments across over 130 projects, which are expected to add 22 500 MW to grid capacity over time. Efforts are also underway to expand transmission capacity for effective grid connection.
Broader implications
Stable and secure electricity supply is essential for industrial development and economic growth, alongside other factors such as policy certainty, strong public institutions, and a stable macroeconomic framework. Increased efficiency in other network industries like ports, rail, water supply, and telecommunications is equally important. As such, the continuity of reforms will be a crucial test for the Government of National Unity (GNU). Barring significant setbacks, the GNU's commitment to policy continuity has already garnered a positive response from financial markets, bolstering confidence in the economy's turnaround.
Week in review
Private Sector Credit Extension (PSCE) accelerated to 4.3% y/y in June, up from 3.9% in May (revised down from 4.3%). This surpassed the Reuters consensus estimate of 4.0% growth. The improvement was driven by corporate credit, which expanded by 5.1% (up from 4.3%, revised down from 5.0% in May). Within corporate credit, vehicle asset finance surged to 16.7%, the fastest pace since April 2014, compared to 9.9% in May. General loans and advances moderated to 6.3% from 7.1%, while mortgage advances edged up slightly to 3.3% from 3.2%
Household credit growth slowed marginally to 3.3% in June, from 3.4% in May, the weakest pace since March 2021. Within household credit, asset-backed credit continues to show mixed trends: car finance increased to 6.3% from 6.2%, while home finance dipped to 2.7% from 2.8%. Unsecured credit also shows divergent trends: general loans and advances contracted by 1.4% (worsening from -0.7% in May), overdrafts slowed to 0.9% from 1.3%, but credit cards accelerated to a robust 10.7% from 9.5%, indicating increased card usage for consumption.
Year-to-date, PSCE growth averaged 3.7%, half the rate of 7.4% in the same period of 2023. While corporate credit has shown resilience in the last few months, household credit growth has continued to weaken, reflecting the impact of high borrowing costs and tighter lending standards. This divergence suggests a strain on household finances and could dampen overall spending activity in the near term.
The trade balance recorded a surplus of R24.2 billion in June, up from a downwardly revised R20.0 billion (previously R20.1 billion) in May. This improvement occurred despite a 3.4% monthly decline in exports to R172.0 billion, as a significant 13.6% monthly decline in imports maintained the surplus. Year-to-date (January to June), the decline in imports has been broad-based across major merchandise categories despite a less depreciated rand, reflecting subdued domestic demand. Imports of vehicles and other transport equipment are down 23.3%, followed by machinery and equipment down by 17.6%, and mineral products, which are down by 4.8%. While the reduction in imports signals weakness in the import sector, it also suggests a moderate widening of the current account deficit to 2.0% of GDP from 1.6% in 2023, better than earlier projections.
The Absa PMI jumped from 45.7 points in June to 52.4 index points in July, signalling a solid rebound in both domestic and external demand. Business activity surged by 14.5 points to 50.8, while new sales orders soared by 17.5 points to 55.4, both entering expansionary territory. This suggests that the demand that had been put off because of policy uncertainty is now supporting the market and is compounded by export sales. Furthermore, purchasing prices continued to ease, partly reflective of lower fuel prices. However, supplier delivery times are worsening, suggesting that supplier ability to manage rising demand is limited. This could stifle performance going forward, as optimism on near-term conditions continues to rise.
New vehicle sales increased by 657 units to record 44 229 units in July, reflecting a 1.5% y/y rise. Passenger car sales increases by 6.8% y/y, with the rental market's seasonal uplift supporting a solid 17.1% contribution. Nevertheless, light commercial vehicles declined by 8.8% y/y, medium commercial vehicles by 6.6% y/y, and heavy trucks and busses by 3.7% y/y. Year-to-date, new vehicle sales were lower by 6.3% relative to the same period last year. However, the cessation of load-shedding, continued launches of new products, a stronger rand, and the expectation of lower interest rates should support the market going forward.
Week ahead
On Wednesday, data on SA's foreign exchange reserves for July will be published. South Africa's gross foreign exchange reserves were barely changed at $62.1 billion in June. The decline in gold reserves was outweighed by higher foreign exchange reserves (including Special Drawing Rights holdings). Overall, changes were mainly driven by valuation and asset price adjustments, which were offset by foreign exchange payments made on behalf of the government.
On Thursday, data on manufacturing production for June will be released. Total manufacturing production, not seasonally adjusted, declined by 0.6% y/y in May, following a downwardly revised 4.9% increase (previously 5.3%) in April. Seasonally adjusted output fell sharply by 3.2% m/m, partially reversing the 5.2% monthly increase in April. This aligned with the manufacturing PMI business activity index, which fell deep into contractionary territory in May, reaching 38.1 points from 57.2 in April. Worryingly, the business activity index contracted again in June, indicating that output likely weakened further at the end of 2Q24
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 29 Jul | SA | Private sector credit % y/y | Jun | 4.3 | 3.9 |
| 31 Jul | SA | Trade balance R billion | Jun | 24.2 | 20.0 |
| 1 Aug | SA | Manufacturing PMI | Jul | 52.4 | 45.7 |
| SA | Naamsa New vehicle sales % y/y | Jul | 1.5 | -14.0 | |
| SA | Electricity production % y/y | Jun | 5.4 | 5.5 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 7 Aug | SA | Foreign exchange reserves $ bn | Jul | 62.1 | |
| 8 Aug | SA | Manufactruring production %m/m | Jun | -3.2 | |
| 1 Aug | SA | Manufactruring production %y/y | Jun | -0.6 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 81,868.82 | 1.5% | 3.1% | 7.0% |
| USD/ZAR | 18.27 | -0.4% | -1.7% | -1.0% |
| EUR/ZAR | 19.69 | -1.0% | -1.4% | -2.5% |
| GBP/ZAR | 23.23 | -1.8% | -1.9% | -1.3% |
| Platinum US$/oz. | 958.75 | 2.8% | -3.3% | 4.1% |
| Gold US$/oz. | 2,445.42 | 3.4% | 5.0% | 26.5% |
| Brent US$/oz. | 79.52 | -3.5% | -7.8% | -4.4% |
| SA 10 year bond yield | 10.12 | -1.1% | -5.4% | -8.2% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.7 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.8 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.2 | 4.8 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 4.9 | 4.4 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.5 | 4.4 | 4.6 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.40 | 17.60 | 18.30 |
