South African Reserve Bank cuts forecasts after blackouts hit economy

South Africa has downgraded its economic projections following the worst-ever spell of rolling blackouts in the continent’s most industrialised nation.

The South African Reserve Bank raised its benchmark rate by a quarter of a percentage point to 7.25 per cent, a smaller hike than in previous policy decisions and below the half-point level that most economists had expected, warning that the country’s economy would barely grow this year.

In November, it had forecast a 1.1 per cent expansion. But that was before Eskom, the struggling state electricity company, began cutting power every day for up to 10 hours. The bank now expects growth of just 0.3 per cent.

The outages occurred for more than 200 days in 2022 and have continued every day so far this year. The central bank said it was expecting Eskom to impose 250 days of rolling blackouts this year, up from a previous forecast of 100 days. The power cuts will remove “as much as 2 percentage points from growth in 2023, compared to the previous estimate of 0.6 percentage points”, it said.

The central bank also slashed growth forecasts for 2024 from 1.4 per cent to 0.7 per cent, when it expects about 150 days of power cuts.

Eskom generates nearly all of South Africa’s electricity supply. Breakdowns at ageing coal power stations, corruption, and a lack of funds for maintenance have all added to pressure on President Cyril Ramaphosa’s government.

The shift to a slower pace of tightening comes as the central bank continues to battle above-target inflation.

South African inflation remains above the midpoint of a target range of 3 to 6 per cent, but the pace of price rises has faded in recent months. The bank said that inflation, which ended 2022 at 7.2 per cent, should fall to 5.4 per cent this year.

“The shift in focus towards economic growth comes at a time that inflation pressures are starting to dissipate,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

The bank’s forecast highlights the prospect of blackouts for several more years. Infighting in the ruling African National Congress over fixing Eskom and delays in finding alternative sources of power are set to continue to weigh on growth for the foreseeable future.

Many South African companies are, however, rushing to set up their own independent supplies of power after Ramaphosa’s government cut red tape that protected Eskom’s monopoly.

“That is capital expenditure that should have gone on spending, investment, and employment, but is going to supplying electricity,” Thabi Leoka, an independent economist, said.