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Eskom mess fuels recession watch, BoA Merrill Lynch says

Foreign investors take wait-and-see approach.

South Africa will face another recession by year’s end if the Eskom load shedding debacle isn’t remedied, according to forecasts by Bank of America Merrill Lynch. 

GDP growth will plummet by year’s end and signal a recession, which is two quarters of sub-zero growth, Michael Jacks, head of equity research in Johannesburg at Bank of America Merrill Lynch, told reporters on March 20 in the city’s Rosebank area.

“If stage four load shedding has to continue for the rest of the year, GDP growth will likely be negative and it will be question of how negative,” Jacks said. “Definitely there is a risk of recession.’’

The bank may have to adjust its forecast of a 1.3% growth in gross domestic production this year, up from 0.8% last year. It also predicted GDP growth may hit 1.5% in 2020. The increase for this year was based on the election of Cyril Ramaphosa to head the ruling African National Congress party last December. 

However, that optimism has been replaced by worries over how much impact Eskom’s load shedding will have on the economy. 

What’s needed are structural reforms and most international investors are holding off investing in South Africa until after national elections in May when President Cyril Ramaphosa could have a stronger mandate to fix the country’s problems, John Morris, head of South African strategy at Bank of American Merrill Lynch, told the same briefing.

The reforms could be “easy” ones like streamlining the visa process to boost the tourism industry, an auction of airwave spectrum to broaden and cheapen internet access through competition, Morris said. Other needed reforms, such as in labour relations and restructuring Eskom will take longer, he said.

These needed reforms and others such as downsizing the cabinet may face opposition from within the ANC by factions loyal to former President Jacob Zuma. Sidelining that faction is “critical,” Jacks said. “Just in terms of business confidence, we do need a scenario where we have a strong Ramaphosa where he will push through the reforms.’’

Meantime, foreign investors are taking a wait-and-see approach. 

“They say ‘call me when something changes. I’m waiting for the election’,” Morris said. “They want to see the reform that brings the growth.” When they are interested, it’s primarily in consumer brands and industrials, but not resources, he said. 

That could mean an opportunity for local investors. The platinum and palladium market is undersupplied and will be for next year, while stocks in the sector are still discounted, Morris said. 

Likewise, local investors may see attractive bond yields if Eskom blackouts eventually cause bond ratings companies to downgrade South Africa’s debt. The downside is that $5 billion of bond investments – following $8 billion last year – could flow out of the country if there’s a downgrade, Morris said.

Other attractive local investments continue to be private education, as well as tobacco, telecoms and healthcare, the bank said. Banks have slipped a bit in investor interest because valuations got a bit too high for local investment managers, Morris said.

South African consumers – at least part of the engine for economic growth – continue to be “in a tough space,’’ the bankers said. And the overall sentiment was bleak among attendees at a recent Sun City conference put on by the bank. Job cuts and restructuring may be the order of the day to drive growth, not revenue expansion, they said. And Eskom was the overriding concern.

“The second the lights go off, consumers leave the dealership floors, they leave the shopping centres, they don’t go shopping,” Jacks said. “There is a very direct and immediate impact of load shedding and obviously this does cause concern for the outlook over the next 12 months.”

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At least some positives out of this, is the one-year outlook for platinum & palladium metals (and their related company stocks).

Using the logic (!) of our esteemed and learned (?) deputy prime minister surely a ‘recession’ is a sign of growth (to much applause from the ANC benches)!

Anybody in RSA who still believes the ANC can govern RSA lives in cloud cuckoo land. Magaret Thatcher said the ANC cannot manage this economy = proved correct. She also said that the problem with socialism is that you run out of other people’s money = proved correct.
Nobody at ESCOM is anywhere near the class or ability of Dr John Maree. Not till “Jesus comes” as Zuma suggested
If you are younger than 40yrs old – leave ASAP

“The bank may have to adjust its forecast of a 1.3% growth in gross domestic production this year, up from 0.8% last year”

Without power how are you going to have economic growth let alone even stagnation.

Chris Yelland said that stage 2 loadshedding costs the South African economy R2bil a day. Let’s average the current situation + the 2 weeks which Gohan said and we have 21 days multiply this by the 2billion and we are sitting with approximately R42bil lost.

To put this in a simple perspective, it costs the economy 0.03% GDP per day of load shedding at stage 1.

Now that 21 days at stage two of 0.06 per day equals to 1.35% of lost GDP.

Sorry guys but the recession is back as there are still 9 months of still to go through of more load shedding, striking and EWC.

i think Michael Jacks probably meant “Two quarters of subsequent negative growth”, rather than “two quarters of sub zero growth”.

Henry666. I cannot decide which term I detest most – negative or sub zero GROWTH. To me they are both revolting terms thought up by an economist who had no feeling language.

Next weeks ratings meeting should take us to Junk.. EWC + SARB nationalization + scandals galore at commissions with zero political appointee arrests are bad enough.. but SOE failings due to debt and now national load sheddings which will drag GDP down will mean tax revenue will be off.

So yah.. I’d say it’s all but guaranteed we heading into junk and some economists say it’s already priced in. Sure capital outflows from investments but also skilled people exodus will mean this country is collapsing in on itself fast and tax revenues are gonna become harder to come by.

In 1994 the anc crowed…” We are ready to govern”….and in barely 25 years they have dispelled that myth and BS by wrecking every once fine SOE and all public service handed over
to them and their “custody”

Move over fools, practice time is over and your indolent anc mob has not and by all accounts, will never “cut the mustard!”

10/10 though for looting and self enrichment!!!

How can the banks forecast growth when all the computers are off?
Another secession? At least we will all be poor together.

As a nation we are sometimes our own worst enemy. The media put a negative spin on a CEF subsidiary buying a part of Optimum out of its mess. The deal is urgent and would secure a viable and important and right now critical coal supply to Eskom – and the buyers are a sister to Eskom. Extraordinary times call for extraordinary measures, not some DA talking head trying to score election points by quoting contraventions of obscure parts of the PFMA sub regulations when the transaction itself was published and we are in stage 4 with a few thousand families without income at Optimum.

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