As Differential Capital’s Quarterly Review for Q2 highlights, loadshedding has become a massive pain point for government, corporates and households alike. It is undoubtedly having an impact on overall economic output, but also influences how we view the listed economy.
The impact of loadshedding varies considerably between different sectors. In the retail sector, food and apparel retailers have taken steps to work around loadshedding, including the use of back-up power generation by landlords and retailers themselves. Where generators are being used, fuel costs will impact operating expenses, which may be passed on to consumers. This is a concern for growth and margins, especially if loadshedding worsens over the next decade. And many smaller retailers simply don’t have the means to procure back-up power.
Loadshedding has the largest potential impact on secondary sectors like producers and miners, which tend to be the most energy intensive. Electricity and fuel are among the key cost drivers for food producers, although many companies have prioritised self-generation projects and conservation to ensure continued production even during loadshedding. The Minerals Council says the mining sector aims to reduce its consumption from the national power grid by as much as 30% by creating 73 self-generation projects.
In the financial sector, one of the most obvious impacts will be on short-term insurers, where the impact will be likely through higher claims rates: more car accidents because of non-functioning traffic lights, for example. Loadshedding is also associated with higher levels of theft and hijackings, and power surges that result from loadshedding may increase claims rates on household items.
On the positive side, South Africa has managed to increase economic productivity over the past two decades, even though energy capacity has been largely stagnant, resulting in a more energy-efficient economy. This is because the sectors that have seen the largest growth are less energy intensive. For instance, the manufacturing sector – one of the more energy-intensive sectors – lost roughly 0.5% per year of its contribution to GDP between 2002 and 2015. This period coincided with considerable gains in energy efficiency.
But the biggest impact of loadshedding is through its negative impact on business confidence, which has a direct impact on overall outputs through its effect on investments. Over the past 35 years, changes in business confidence have explained 43% of the changes in investment levels. Even though investment generally results in job creation and better infrastructure, it also directly accounts for roughly 15% of GDP, so any major negative shocks to confidence directly translate to lower levels of growth.
Of course, loadshedding is only one of the factors that may dampen confidence. The first half of the year has already seen several threats of a national shutdown and rising concerns around civil unrest. These factors influence how we assess the risks across our funds. We welcome the potential changes to energy regulation announced by the President, and over the medium term, this could improve confidence in both consumer and business sectors. It is going to become more important to understand the short-term risks because continued load shedding could be materially negative for South African stocks.