South African coins sit in this arranged photograph in Pretoria, South Africa, on Wednesday, Aug. 14, 2019. (Photo: Waldo Swiegers/Bloomberg via Getty Images)
The first sign the economy was recovering from a colossal Covid contraction was in early July, ironically, when Eskom resumed load shedding. Other indicators, including intriguing ones based on big data, support this scenario. But South Africa is still only about 77% back to normal.
South Africa’s economic hole is so deep that it will take a long time to climb out of it. And Eskom remains a key obstacle to, and indicator of, its progress.
First, recall the sheer scale of the destruction likely wrought in the second quarter of 2020, which began days after the start of the hard lockdown and ended with the economy gradually rebooting but with wide swathes still at a standstill.
The estimates are numbing, and make the recession that preceded it almost resemble a lost era of prosperity in hindsight. (Note: load shedding was a thing then too).
“Overall, we think that GDP probably contracted by 22% q/q in Q2 (and 63% q/q on an annualised basis), one of the largest falls in output anywhere in the world. Some sectors – most notably hospitality services and construction – have probably seen even sharper falls in output than 20-30% q/q declines suffered by the manufacturing and retail sectors,” Capital Economics said in a recent research note.
Investec said in a note last week that it was forecasting a Q2 shrinkage of 48% but noted that incoming data suggested it could reach 60% on an annualised basis. (By the way, to “annualise” generally means converting a short-term calculation – in this case four months – into the same rate over a full year.)
So the crater created by the Covid-19 asteroid is massive.
But even extinction-level events are followed by fresh stirrings of new life. In South Africa, that became apparent in July, two months after the mining sector began its reboot and as other parts of the economy slowly reopened. That was when Eskom brought back the load shedding, which had not been implemented since before the hard lockdown was imposed on 27 March.
Rising power demand was partly related to the fact that it was winter but also stemmed from increased economic activity.
And there have been other signs of tepid third-quarter recovery. Lombard Odier, a private Swiss bank, using its proprietary process and models of big data, said that as of 9 August, South Africa had recovered 77% of its pre-Covid-19 economic activity, compared to the 2017-19 average.
“We watch eight high-frequency signals: import and exports, city congestion levels, mobility data, retail and grocery consumption, workplace presence and air pollution levels for production. Taken together, they can give us a picture of the state of an economy’s recovery,” Stéphane Monier, Lombard Odier’s chief investment officer, said in a note.
An Eskom that reliably kept the lights on should be a cause for celebration. Instead, it is now a massive warning light for investors in South African assets to dump them while scrambling for the hills. It is a signal of a contraction event on the scale of the one we just witnessed in Q2.
Such big data measurements can give a more current snapshot for investors than government data, which often has a one-month lag or more. Stats SA’s official assessment of the Q2 GDP performance only comes out next month and Q3, which we are currently in, won’t be published before December.
“The challenge for investors is to gauge progress toward ‘normalisation’ in comparison with historic levels of supply and demand. As a result, this pandemic is turning into the most powerful test yet for the value of data science. The right data sets can help us to improve our real-time diagnosis of the recovery and market trends.
“That means that it can also help us as we make investment decisions and construct portfolios. Before we can include a data set in our investment analysis, we compare it with other indicators to ensure that their insights are adding value to our forecasts.
“We can then use this to fill the gap between official government numbers, which often reports statistics with a lag of a month or more,” Monier said.
Still, 77% of the economy remains, which means SA is about a quarter short of where the economy would presumably have been without the pandemic. And another, less scientific indicator than Lombard Odier’s, is Eskom’s performance, though this could also likely be quantified.
As the economy moved to Level 2 on Tuesday 18 August and bottle stores and bars flung their doors open to a thirsty public, Eskom once again spoiled the party with yet another bout of load shedding.
This highlights a truly terrifying fact about Eskom: it can only keep the lights on in a contracting economy, or one that is smaller than the truncated version we have now. Let’s face it, Eskom only did the job it was supposed to do when the economy was melting down.
So here’s one rule of thumb for the rest of 2020: the brisker the economy attempts to rev up, the more load shedding that will ensue. It is a vicious cycle: the economy tries to sputter along, but Eskom keeps a firm leash on it.
A 90% recovery level based on data indicators would almost guarantee frequent load shedding, which of course, in turn, constrains the recovery. It also means that economists and fund managers have to deal with some intriguing counter-intuitives around the issue of power supply.
An Eskom that reliably kept the lights on should be a cause for celebration. Instead, it is now a massive warning light for investors in South African assets to dump them while scrambling for the hills. It is a signal of a contraction event on the scale of the one we just witnessed in Q2.
But if Eskom is load shedding, it is at least a sign of economic life. And that right now seems to be the best investment case that South Africa has at its disposal. Come have a look! If we can’t keep the lights on, something must be growing! If this is the best South Africa can do, both the public and potential investors would be entitled to take an appropriately dim view. DM/BM
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