South Africa: Enforced Blackouts Further Weigh on a Troubled Economy

3 MINS READOct 17, 2019 | 19:59 GMT
The Big Picture

South Africa, home to over half of Africa's largest corporations, remains a major regional power. But years of corruption and mismanagement have sapped its economic vitality. As President Cyril Ramaphosa and his allies work to pull the country from the brink of disaster, they must confront its many deep structural economic problems such as the unreliability of its electrical grid.

What Happened

For the second straight day, South African electricity consumers have had to contend with unexpected power cuts affecting businesses and households across the country. The embattled national electricity provider Eskom, which supplies about 95 percent of South Africa's electricity, ordered the outages in a maneuver called load shedding after failures at several generation plants endangered the integrity of the power grid.

Why It Matters

In the short term, the cuts, amounting to about 2,000 megawatts, have wreaked havoc on South African businesses and households. Operations at entities with access to backup generators could continue, but the cost of operating them will drive up overhead. In the longer term, however, the cuts underscore the fragility of the South African electrical grid, saddled with aging and poorly maintained infrastructure, and may indicate a rough summer ahead as seasonal demand increases.

Moreover, as the government continues to formulate its turnaround strategy for the utility, the failure to anticipate the expense of emergency repairs to the failed plants will heap ever greater pressure on Pretoria to find solutions. (Already, the government has had to spend more than $8 billion just to keep the company financially afloat.) The current woes will almost certainly factor into the upcoming assessment of South Africa's credit rating by Moody's Investors Service. Alone among the three major credit rating agencies, Moody's ranks South Africa's debt as investment grade, but only one step above junk status. But should it join Standard & Poor's and Fitch Group in assessing South Africa's debt as junk-grade, many fund managers with investment-grade mandates would be forced to dump their holdings in the country, leaving even fewer resources for President Cyril Ramaphosa's government to use to turn the economy around.

What to Expect

As it works to reform Eskom, the Ramaphosa administration is battling pressure from South Africa's powerful labor unions to maintain employment levels at the utility and prevent future privatization of the woefully inefficient company. Consequently, as the government formulates its Eskom turnaround strategy, it will be critical to track its willingness to take on these union interests to gain more room to maneuver. Failure to turn around Eskom will damage the country's economic growth prospects and discourage foreign investors from keeping their money in South Africa.

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