Eskom’s woes are filtering through to the economy
An economy is a bit like an ocean liner – once it reaches cruising speed it is difficult to stop; and just as difficult to change direction. For the most part an economy will ignore small hindrances and continue on its predetermined path. And South Africa’s economy has benefited from such ‘plain sailing’ over the last decade or more.
There are two ways to put the brakes on an economy. You can slow it down by exerting continuous pressure through small changes to some economic variable. Or you can crash into something solid (like the Titanic did all those years ago). While slow and steady is the preferred method it seems factors beyond our control could cause the domestic economy to grind to a sudden halt.
Giant change a little step at a time
An example of the ‘slow and steady’ approach is that taken by Reserve Bank governor Tito Mboweni in his attempt to keep the consumer price index in the targeted 3% to 6% range. His main weapon in the fight against inflation is the interest rate which he has raised consistently (half a percent at a time) over the last two years. A look at recent consumer numbers show that Mboweni’s primary objective of slowing consumer spending has worked. We have experienced a definite slowdown in most categories of retail spending, with new passenger cars and housing also cooling significantly.
Unfortunately consumer spending is not the only driver for inflation. There are a number of external factors that Mboweni cannot control, and these have kept pressure on domestic price levels. Rampant food and fuel prices remain a major reason for higher prices. If this were not enough, just as Mboweni’s measured attempts to cool price levels were showing some fruits; an unexpected shock laid his efforts to waste.
An economic crash
Earlier this year the SAS South Africa crashed full speed into the iceberg of electricity supply crisis. State utility company Eskom revealed it was unable to sustain the integrity of the national electricity grid. Its immediate solution was to engage in systematic ‘load shedding’ or rolling blackouts to ensure that the entire network didn’t crash. These actions were met with huge protests, with individual taxpayers, company executives and opposition parties called for heads to roll.
To lessen the ‘reach’ of these power outages, Eskom took the unprecedented step of cutting supply to its largest consumers. It pulled the plug on many of the country’s platinum and gold mining operations. Some mines lost more than a week’s production. A deal was subsequently reached to allow these facilities to continue operations at 90% of their previous electricity consumption. Eskom and government may be claiming victory in the short-term, pleading with us to dance on the main deck as the ship takes on water... But the damage has been done. Economists expect the power supply dilemma to have a significant impact on GPD growth in coming months as business comes to terms with the new challenge and foreign investors halt capital intensive inward investment.
Yesterday’s headlines reveal what happens when a massive and unexpected event impacts on an economy. Gold Fields, the country’s largest gold producer says it is considering shedding 6 900 jobs if it cannot restore full power to its operations. The outfit says it cannot survive on 90% of its historic electricity consumption for the five years Eskom expects it to. Fin24 reported that the company could ‘lose’ 3 000kg in production in the current quarter – the equivalent of R697m in revenue. As other mines and heavy industries take similar steps to avoid massive losses the country could shed thousands of jobs.
Short-term insurers showings signs of strain
The knock-on effect will be felt across every sector of the domestic economy. And the shock will be felt most severely in the already stressed consumer market. As industry sheds jobs the amount of disposable income will shrink. Even defensive industries like insurance will be hard hit.
The Financial Services board recently published its quarterly update for the short-term insurance industry. The report combines the results of short-term insurance players in various categories. In the typical insurer category (defined as insurers who offer most types of policies to, mostly, the general public) net premiums have fallen each year since 2004. Underwriting profit as a percentage of net premium is on the decline too. This number halved from its peak of 12% in 2002 to a mere 6% last year. But perhaps the most alarming statistic is that the premium growth achieved in 2007 (at 4%) is the lowest since 2002.
Short-term insurance companies are in for a tough 2008. They will struggle to increase premiums in a difficult consumer environment; and Eskom’s woes look set to make matters worse still.
Editors’ thoughts:
The consumer is under tremendous pressure at the moment. Interest rates are 4.5% higher than two years ago – and food and fuel prices are spiralling out of control. Have you noticed a more cautious approach to expenditure on insurance and investments as your clients defer expenditures they regard as non-essential? Send your comments to [email protected], or add them below.
Comments