Blackouts cut forecast for interest rates hike

Electricity blackouts are threatening SA’s economic growth, giving investors a reason to scale back bets for higher interest rates.

Eskom last week resumed rolling blackouts across the country’s cities as it struggles to meet demand, a month after predicting a high risk of outages in February and March.

A quarter of continual power cuts could shave as much as one percentage point off the economic growth rate, according to Matthew Sharratt, an economist at Bank of America Merrill Lynch.

With the collapse in oil prices putting the brakes on inflation, the strain on the nation’s electricity grid presents a risk to the economy as businesses curtail production.

Derivatives used to speculate on borrowing costs show traders have cut bets on rates increases by more than half in less than a month.

“We will have relatively slow growth and falling inflation,” says Old Mutual Wealth chief investment strategist Dave Mohr. “With that combination, it will be difficult for the Reserve Bank to justify hiking interest rates.”

An electricity crunch that worsened last year led to 15 days of rolling blackouts, with Eskom’s biggest customers including BHP Billiton urged to cut usage at least 10%.

Power output fell 2% in November from a year earlier, while demand declined 0.8%, according to data from Statistics SA.

President Jacob Zuma said at the weekend that the African National Congress (ANC) should not be embarrassed about the first rolling power blackouts in six years because they are a legacy of white-minority rule.

“We must not feel guilty about the energy issue,” Mr Zuma told a rally in Cape Town that marked the 103rd anniversary of the ANC. “We are in fact solving the apartheid problem, that must be very clear.”

Eskom’s managed power cuts for the first time in six years came as ageing plants struggle to meet demand for power. There is a high risk of more blackouts in the next few months, and electricity supplies will remain constrained for another two years as the company builds new generating facilities.

The ANC has limited scope to turn the situation around, as the power shortages, low commodity prices and weak demand for the nation’s exports from Europe constrain efforts to spur growth and create jobs.

The Treasury projects that the economy will expand 2.5% this year, up from 1.4% last year.

Manufacturing output unexpectedly contracted 1.3% in November from the year before, compared with revised growth of 2.3% in October. The median estimate of 15 economists surveyed was for expansion of 1.9%.

The Reserve Bank has kept its benchmark interest rate unchanged since July, when it was raised 25 basis points to 5.75%.

Investors have been curbing interest-rate bets since then after a halving in oil prices helped to bring the inflation rate back within the central bank’s 3%-6% target band.

Forward-rate agreements, used to speculate on borrowing costs, are signalling 39 basis points of rate increases by the end of the year, down from 99 basis points on December 17.

The difference in yield between five-year, fixed-rate bonds and index-linked debt, a measure of inflation expectations over the period known as the break-even rate, fell 50 basis points after reaching a two-month high on December 23.

In contrast, the rate for Brazil fell three basis points during the same period.

Government forecasts indicate the economy expanded 1.4% last year, the slowest since the 2009 recession, and will increase 2.5% this year.

A Statistics SA report on Wednesday will probably show that retail sales growth eased to 2% in November from 3.4% in the previous month, according to the median estimate of 11 economists surveyed.

Power blackouts “have the potential to be a significant headwind to growth,” says Mr Sharratt.

The electricity grid will be “very constrained” for the rest of the summer months and the risk of rolling blackouts will be moderate to high in most weeks, Eskom says. “New generating capacity is needed in order to ease the pressure on the system.”

Mr Zuma said on Saturday that the government is accelerating the pace of bringing the delayed Medupi and Kusile power plants onto the electricity grid.

The currency weakened 0.1% to R11.50/$ on Tuesday, paring its decline since the start of last year to 8.8%. Yields on government rand bonds due December 2026 fell four basis points to 7.58%.

While this year’s growth rate may improve from last year’s, the “persistence of a negative output gap is still very much there,” says Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities in Johannesburg.

“In that environment the Reserve Bank could very well justify keeping rates on hold for perhaps even a longer period than just the first half of the year.” ­–Bloomberg