Giraffe & Co

The Rand has weakened against the Euro even as Euroland’s inflation rate of 9.1% is outstripping SA’s rate of approximately 7.8%. The reasons for this are varied, extensive load-shedding inhibiting production, recessionary forces at play amongst our major trading partners and slowing economic growth. Aggressive Reserve Bank interest hikes create recessionary expectations without being effective in combating inflation, given that this is supply driven, rather than demand driven.

In the 2nd quarter of this year, load-shedding has contracted South Africa’s primary sector (mainly mining, construction, manufacturing and agriculture) by over 5% according to Maarten Ackerman, Citadel’s economist. Whilst the secondary sector also contracted (-4.8%), Ackerman noted that the tertiary sector grew, indicating consumer resilience in the face of inflation. Whether this can last is questionable if inflation continues to increase, but it indicates the impact of load-shedding on the primary and secondary sectors. Encouragingly, the hospitality and restaurant sector indicated 6.2% growth which Ackerman states provides optimism for these sectors as South Africa moves into Spring and tourist arrivals accelerate.

There are other Q2 statistics that should be viewed optimistically – Ackerman noted that Q2 was the third consecutive quarter during which Gross Fixed Capital Formations (GFCF) grew, an indication that businesses were reinvesting back into the economy to increase future capacity on expectation of future growth. This type of investment would generally be in machinery and equipment, ICT and non-residential buildings.

So the energy crisis is core to the country’s growth problems and it is here that one can find some encouraging news. The president’s undertaking to remove caps on private power generation by large manufacturers and mines to render them independent from Eskom is well-known, but what appears to be less well-known are certain applications that have recently been lodged with NERSA. In this regard I quote the following extract from a Nedbank newsletter written by JP Landman some two weeks ago:

“Late on Friday 26 August, the National Electricity Regulator of South Africa (NERSA) put out an innocent-sounding, typically-bureaucratic statement. It asked for public comment on three section 34 determinations made by the Minister of Mineral Resources and Energy, Gwede Mantashe, which the minister sent to NERSA for concurrence.
The bureaucratic story goes like this: NERSA has to ‘give concurrence to’, i.e., agree with, the minister’s determinations before the latter can take effect and power can be legally procured. Before NERSA can give concurrence, it must obtain public comment. Once concurrence is given, the minister can open bid windows that will then be implemented by the Independent Power Producers’ Office. It is a cumbersome and dirigiste system, but that is how it currently works. (This will change too, but that is a different topic.)
The significant news is in the three determinations the minister sent to NERSA for concurrence.

The first one is for 14 791 MW of solar, wind and storage capacity to be procured. A second one is for 1 000 MW from biomass and landfill projects. The third one is for 3 000 MW of gas. This is a massive announcement. It more than doubles the total MWs in procurement, pushing the total over 33 000 MW of capacity that will be opened for bids, and in due course connected to the grid.
Even if we assume there will be no feasible contracts under Bid Window 5 (because prices have moved out of kilter after the war on Ukraine was launched), it will still leave us with more than 30 000MW of new power to be procured and connected. To put this in context, consider three figures:

1. Eskom currently generates around 32 000 MW maximum (installed capacity is much more, but efficiencies are low).
2. Total installed renewables currently run at about 7 000 MW.
3. A further 80 projects, involving more than 6 000 MW, are in various stages of development and registration with NERSA.
These figures make the 30 000 MW a very significant number. It really means the renewables genie is out of the bottle.
Granted, renewables are intermittent. They do not constitute base load and as such one must be careful with comparing numbers, but the quantum cannot be denied.”

So, whilst the process of seeking approval and installing the consequent capacity might take some time, and thus the spectre of load-shedding remains, there certainly is light at the end of the tunnel. Once this news spreads and if the ANC’s election antics can be toned down and the process conducted in a reasonable manner, then the inflation differential between Euroland and South Africa will once again allow the Rand to strengthen, boosted by increased primary and secondary output.

Peter Gees
Chartered Accountant (SA)
Advocate of the High Court of South Africa

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