ShareFinder’s prediction for Wall Street for the next 3 months(top) and the JSE (bottom):
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By Richard Cluver
I began last month’s issue with the comment that, almost alone in a world where 64 countries are heading for the polls to elect new governments, the outlook for the Johannesburg Stock Exchange is one of the very few looking optimistic.
Sadly, with quite dramatic changes in our planetary political stability, not to mention new military confrontations in the Gulf region and sabre-rattling in the Far East, things have worsened since then. Furthermore, South Africa’s decision to become a global arbitrator in the Gaza conflict has not only resulted in a major share sell-off by foreign investors, but it could well provoke a consequence from the US that could damage our economy considerably.
At risk, as I have often warned, is South Africa’s ability to continue participating in the AGOA right to deliver our produce duty free into the US. That right comes up for decision this year and yet we continue to ‘poke the bear.’ Now, 210 US Congressmen have written to Secretary of State Antony Blinken expressing disgust at the action.
The letter adds, “The ANC continues to turn a blind eye to the bloodbath unfolding in Sudan; to the atrocities committed by the Museveni regime in Uganda; and to the collapse of Zimbabwe under Zanu-PF’s reign of terror that has turned the bread basket of Africa into a begging bowl, with significant domestic consequences for South Africa.
“The ANC continues to ignore the plight of the Uyghurs in China, while it’s business as usual with the Russian Kremlin, despite the mounting death toll in Ukraine. The oppression of women and girls in Iran and Afghanistan — along with thousands of extra-judicial political executions in those countries — are but an afterthought for our leaders.
It is therefore reasonable to expect that the ICJ matter would evoke complex reactions from our international partners given the ANCs track record and it would be hardly surprising if one might be the loss of some of the benefits of US patronage, such as AGOA and the subsidies that pay for the immunisation of millions of AIDS victims in this country. That could cost the ANC dearly in this election year, but the ANC’s suddenly full coffers might point to another truth: Who bought the ANC?
Thus, wondering what impact the latest events might have on ShareFinder’s AI-powered future projection system, I went back to compare the graph I published last month with what ShareFinder is projecting now and, comparing the two graphs it is easy to see a marked decline in that projection-optimism. The topmost graph is the one published at the end of December.
And this is how the latest projection looks now when rendered to the same scale:
As you can clearly see, the software accurately predicted the early-January decline and the subsequent increase that is now under way and, as projected, the gains seem still likely to continue during February. But now the projection flattens out in March and falls in the last week. Furthermore, from then onwards the gains are likely now to be far more muted followed by a distinct decline between the end of June and the end of August. At year-end the program sees only a very modest 9.4 percent improvement over the current value of the Blue Chip Index.
Sadly then, things are no longer looking quite so optimistic. And it is hardly surprising because the global truth is that practically everyone everywhere is registering political discontent arising from both high inflation rates everywhere and the high-imposed global interest rates needed to counter them. Together these have effectively led to the impoverishment of most folk everywhere. Bloomberg Economics meanwhile calculates that voters in countries representing 41 percent of the world’s population and 42 percent of its gross domestic product have a chance to elect new leaders this year.
Bloomberg further notes that, “With two wars raging, tensions between the US and China escalating and political polarization worsening before critical elections, the potential for disruption in 2024 is huge. Money managers and corporate planners beware: This will not be the year to keep your investment plans on autopilot.”
Moreover, while South Africa’s extraordinary decision to take Israel to the World Court has perplexed many readers who fail to recognise that the coming election has the ANC grasping at anything that might make it look good…to the Muslim community in SA perhaps…others will question why tiny South Africa? Meanwhile, the conflict in Palestine is showing ominous signs of potentially dragging the entire Gulf region tinder box into a long-feared regional war. Already Lebanon is partially engaged. Now, both the US and UK have begun launching repeated strikes against multiple Houthi targets in the Yemen. The action followed US President Joe Biden’s warning that the Iran-backed militant group would bear the consequences of repeated drone and missile attacks on Red Sea shipping.
It goes without elaboration that even a small localised conflict in the Gulf region implies the risk of sharply-increased energy prices, something which was already becoming a reality because of the necessity of re-routing shipping away from Suez, not to mention other supply disruptions which will likely collectively re-ignite global inflationary pressures and lead to a far longer flight trajectory for the world’s interest rates structure. This is a critical issue, particularly for heavily-indebted countries like Japan, China, the US and Britain which need to reduce the costs of their borrowing but seem completely incapable of reducing Government spending: for them D Day looms ever closer!
Meanwhile, in the South China Sea, there are ever-greater rumblings of potential war-mongering where the election of a new president in Taiwan could clearly re-shape the risky balance between the US and China. The Hong Kong Free Press reports that: “With politics polarised between two blocs – one seen as more pro-Beijing and the other as favouring a more independent, global role…..” the election of the pro-Western Lai Ching-te has already heightened tensions with China.
If Taiwan seems remote to many Western investors, the fact that it is the world’s largest manufacturer of computer chips means that everything electronic, from cars to aircraft to fridges and TVs which today “talk” with one another via embedded ‘smart chips’ means that problems in that island nation could pose big economic challenges to the whole world!
Here in South Africa, apart from the fact that citizens STILL do not know precisely when the general election is likely to take place – and for those planning overseas holidays during the European summer that is beginning to pose problems – for the first time in most lifetimes the general public can only speculate on the likely complexion of our future government. If Cyril Ramaphosa’s ANC was almost certainly going to need to choose a coalition partner if it had any hope of retaining power – and horror of horrors that had informed opinion-makers even speculating the possibility of EFF leader Julius Malema bartering his way to SA President in exchange for his party’s mercurial voting support – the sudden advent of Jacob Zuma’s uMkhonto weSizwe party has infinitely complicated the equation because it is further dividing traditional ANC loyalties and, in the very least, almost guarantees that KZN and large parts of the old Transvaal will thus be lost to the ruling party.
That view meanwhile ignores the threat of a resurgent Inkatha Freedom Party which, because of the leadership vacuum created by the death of its founder, the polarising prince and power broker Mangosuthu Buthelezi, means that the numerically dominant Zulu people could well be casting their eyes in the direction of discredited former President Jacob Zuma. Notwithstanding the overwhelming evidence of Zuma’s corruption stretching all the way back to the ‘Arms Deal’ at the very beginning of ANC government… to the wholesale destruction of the country’s law enforcement agencies and the looting of Eskom and Transnet…. Zuma remains surprisingly popular with the Zulu people and its tribal chiefs for whom he is seen as the lone person of power to have championed their cause.
Here, furthermore, we should not ignore the discord within the Zulu royal family and President Ramaphosa’s apparent miss-step in giving early recognition to the controversial issue of Misuzulu Zulu, the first son of the late Zwelithini’s third wife whom the late king designated as regent in his will and who died suddenly a month after her husband, controversially leaving a will naming Misuzulu Zulu as king. The issue is clearly a tinder box capable of being exploited into serious conflict by Zuma who has more than once illustrated that his personal lust for power and money is apparently more important than the welfare of ordinary South Africans.
Indeed, South Africans should never forget that we are haunted by the history of bloodshed in KwaZulu-Natal and the townships of the Witwatersrand between 1990 and 1994 when, in the last moments of a dying Afrikaner National Party, Buthelezi was a principal figure inciting tribal nationalism among the Zulu in particular with the sobering result of 14 000 deaths as the ANC and Inkatha effectively went into civil war!
And we should not imagine that this issue was simply something to do with the aftermath of Apartheid. The Durban riots of 2022 which were allegedly triggered by political allies of Jacob Zuma – and which led to more than 300 deaths and cost the economy close to R100-billion – are illustrative of the power Zuma still apparently wields in KZN.
In a 2018 editorial headlined “The dangers of Zulu nationalism”, City Press editor Mondli Makhanya reminded us that in the Inkatha Freedom Party-controlled bantustan of KwaZulu, a generation of young people were indoctrinated by a non-examinable subject called ubuntu-botho. The subject was the brainchild of the IFP-affiliated Africa Teachers Union, the Schools Inspectors’ Association of KwaZulu and Inkatha-leaning academics at the University of Zululand.
It included what Makhanya described as a “raw brand of Zulu nationalism”. The ugly result of this indoctrination was the violence seen in the years of transition. The desire by the IFP that KwaZulu should secede and not join a democratic South Africa mirrored the indoctrination in the classrooms, which taught children to pursue the dream of the restoration of the Zulu empire…..and 14 000 people died as a result with peace only being restored when Jacob Zuma stepped in to end the violence.
Finally, and probably foremost so far as investors globally are concerned, is the US economy where, with the latest statistics’ indicating that non-farm payroll employment having increased by 216 000 in December, recessionary fears have been steadily receding. However, US inflation hit 3.4 percent over the past 12 months, up from 3.1 percent in November.
It accelerating more over the month than most analysts had expected and is accordingly likely to keep the US central bank cautious about declaring victory in its fight against inflation. The US Federal Reserve has an inflation target of 2 percent and, until last summer, had been raising interest rates to cool price rises.
But if the general public was expecting inflationary fears to abate in the short-term, the money markets were not. My first graph makes it clear that the yield of US 30-year T Bonds had been rising since December 28 when they hit a long-term low of 3.95 percent. ShareFinder, however, currently predicts that the up-tick in bond yields is merely a seasonal event and that yields are likely to continue falling steeply from around February 9.
Moreover, the New York equities market turned bullish as far back at October 2022 and, despite a brief pull-back between August and the end of October 2023, has remained so. Furthermore, ShareFinder is growing steadily more optimistic about the future of the US share market during 2024. Though the trend of the green trend line is still a fairly modest forecast rate of 7.4 percent, it was until recently trending downwards in a widening formation so this change speaks of quite marked market indecision.
And while there is nothing more constant than change, ShareFinder’s projection of the likely trend of the JSE All Share Index is abating from its previously very bullish view. Note in my expanded graph below my bold green trend line is still forecasting gains of 10.4 percent. However, the yellow long-term Fourier line is currently peaking which suggests an imminent apex of the recent bullish cycle while the anticipatory Mass and Velocity indices in the lower two graphs of the composite peaked respectively in July and February 2023; both strongly suggesting coming weakness:
In uncertain times, I always advocate that one move decisively into Blue Chips which I define in a primary sense as shares of companies which have paid constant or rising dividends for at least a decade. Of course the Covid pandemic caused many of the best to pause dividends in 2020 which now makes for a very attenuated local list which has necessitated moving down scale somewhat into the Rising Stars, shares of companies that have similarly paid dividends constantly for at least five years.
However, as the graph composite below suggests, the quality difference between these two categories makes for somber consideration. The Blue Chips are projected to continue their steady compound 48.9 percent gain, at least until mid-year, while the Rising Stars have already been in decline since last May and ShareFinder does not see a trend up-turn until early June:
South Africa’s greatest economic problem is, of course, NOT just the ANC but rather the policy uncertainty which surrounds South Africa’s political future. That problem is exacerbated by load-shedding and infrastructure collapse which is making it increasingly difficult for SA industry to remain globally competitive and is preventing us from effectively capitalising on our primary export-earning capacity in mineral and agricultural product exports.
Solve those, and our share market looks remarkably cheap, as Investec Chief Economist Annabel Bishop has noted in her latest report, our growth outlook for 2024, at 1.0% y/y, is stronger than 2023’s likely 0.5% y/y outcome, with 2024 expected to see the start of an interest rate cutting cycle, as well as lower inflation on average, and improvements to infrastructure.
“Economic growth will be lifted by a reduction, to planned eventual elimination, of congestion at the ports, although electricity supply is not expected to fully, and consistently, meet demand this year, and higher stages of load shedding are likely. That is, load shedding is likely to persist through 2024, at risk of worsening from stage 3/4 as insufficient capacity comes online, but 2025 should see more capacity from private sector generation, with further build-up over subsequent years.
But, if we – and, almost more importantly foreign investors who have been dumping billions of Rands worth of SA investments, cannot be offered something better than a fragile cobbled-together government of opposing political parties with extremely disparate economic objectives as an alternative to the extractive corruption that is the current hallmark of the ANC, the champagne socialistic EFF and, probably other ANC breakaways like Jacob Zuma’s incipient uMkhonto weSizwe, the Land First and outsiders like Ace Magashule’s rapidly failing grouping, we are in trouble.
Nevertheless, there are clear signs of a powerful Second Economy within South Africa which I have previously written about. Simply then, if one contrasts the JSE dividend yield average of 6 percent compared with Wall Street’s 1.47, the magnitude of a potential four-fold market recovery becomes evident. Add to that the investment potential as the global investment pendulum swings back towards developing nations concurrently with the likelihood of globally-declining interest rates if Central Bank scenario-planning remains on track: if it is, in other words, not de-railed by surprise events like the often feared Chinese invasion of Taiwan as Putin-style nationalism spreads across the globe, dramatic value swings become very likely!
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Happily, by comparison with the heavily indebted nations, South Africa’s current 72.7 percent debt to GDP ratio is comparatively low. Surprisingly for example, since China is still viewed by most observers as the international powerhouse of economic growth, few appreciate that China played a central role in increasing global debt in recent decades as borrowing outpaced economic growth. Debt as a share of GDP has risen to about the same level as in the United States’ 123 percent, while in dollar terms China’s total debt ($47.5 trillion) is still markedly below that of the United States (close to $70 trillion).
As for non-financial corporate debt, China’s 28 percent share is the largest in the world and it is very likely that any new financial crisis during 2024 might begin in China which is currently trying to defuse a financial time bomb that could severely damage its banking system. Cities and provinces across the country have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending. The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. That includes corporate bonds issued by thousands of so-called local-government financing vehicles, which borrowed money to build roads, bridges and other infrastructure, or to fund other expenditures.
No one knows what the actual total is, but it has become abundantly clear over the past year that local governments’ debt levels have become unsustainable. China’s economic growth is slowing and the country is battling deflationary pressures that will make it harder for local governments to keep up with their interest and principal payments.
Just as Vladimir Putin arguably invaded the Ukraine in order to distract his citizen’s attention from Russia’s appalling economic woes, China’s soaring debt is likely to result in similar distractions…..like a move on Taiwan which could have dramatic repercussions for the global electronics industry since it is the leading manufacturer of computer chips!
In a bumpy 2024 investment world, a politically changed South Africa could just offer attractive safe-haven status!
By Nick Giambruno
Contrary to conventional wisdom, higher interest rates mean more inflation in the environment today. That’s because the federal interest expense increases as interest rates rise. As the federal interest expense rises, so does the budget deficit. As the budget deficit increases, so does the currency debasement needed to finance it. Skyrocketing interest expense will thus have an enormous impact on the US budget.
Even according to the US government’s rosy projections, the interest expense on the federal debt will exceed $1 trillion for the first time in 2024… and it shows no sign of slowing down. On the contrary, it’s growing exponentially. First, it’s essential to understand the basics of the US federal budget so let’s zoom out and look at the largest components of the US federal budget from the latest available data in the chart on the right:
The biggest expenditures for the US government are so-called entitlements. It’s not likely any politician will cut these. On the contrary, I expect them to continue to grow.
With the most precarious geopolitical situation since World War 2, so-called “National Defence” seems unlikely to be cut. Instead, military spending is all but certain to increase. Income Security is a catch-all category for different types of welfare. That’s unlikely to be cut too. Unless it becomes politically acceptable to cut things like Social Security, military spending, and welfare, efforts to make a dent in expenditures won’t be meaningful. Further, interest expense (Net Interest above) is set to explode higher.
The US government projects that the federal interest expense will exceed $1-trillion in 2024 for the first time. That means the interest expense will exceed defence and everything else in the budget except for Social Security, which it will also likely exceed soon. As the cost of debt service is taking up a larger portion of the budget, there is less for other expenditures. That means the government has to borrow increasingly larger amounts to maintain basic functions.
However, it’s worse than issuing more debt to cover Social Security and the military. The US government is now borrowing money to pay interest on the federal debt, which has a compounding effect as the federal debt and interest expense grow exponentially. I suspect we are close to the inflection point where it gets out of control. 2024 could be the year that it becomes evident the US is trapped in a debt spiral.
Here’s the bottom line with the budget. The most significant expenditures have nowhere to go but up. But don’t count on increased revenue to offset these increases. Even if tax rates went to 100%, it would not be enough to stop the deficits—and the debt needed to finance them—from growing.
The US government is out of options. Therefore, the question is not whether it will default but how? When faced with a choice, politicians always choose the most expedient option. In this case, that means issuing more debt rather than making tough budget decisions or explicitly defaulting.
There is a big problem with that, though. As the amount of debt skyrockets, the interest rate rises to entice buyers and holders. Allowing interest rates to rise high enough to entice natural buyers would bankrupt the US government because of the higher interest costs, which are set to become the largest item in the budget.
So, I would not expect the Fed to raise interest rates much more. In fact, they have already paused the rate hikes and are signalling a pivot to easing again, likely for this exact reason.
That means the Fed has effectively given up on bringing price inflation down even though the year-over-year change in the CPI remains above 4%, more than double the Fed’s target of 2%. In other words, even with their own crooked statistics and rigged game, the Fed has failed even to come close to their inflation target. It’s a massive failure.
Bloomberg is already hailing it “The Great Monetary Pivot of 2024:”It’s crucial to understand that by surrendering to inflation, the Fed is returning to the same policies that caused prices to rise in the first place. So, if higher interest rates are off the table and cannot entice more natural buyers, who will finance these growing multi-trillion dollar budget deficits?
The only entity capable is the Federal Reserve, which buys Treasuries with dollars it creates out of thin air.
That’s why I am convinced extreme currency debasement is the inevitable outcome. All the rest is noise.
The US government’s only practical option is ever-increasing currency debasement… and it could devastate most people. I suspect it will all go down soon… and it won’t be pretty. It will result in an enormous wealth transfer from savers and regular people to the parasitic class—politicians, central bankers, and those connected to them.
Countless millions throughout history were wiped out financially—or worse—because they failed to see the correct Big Picture as their governments went bankrupt.
Don’t be one of them.
The financial position of the US government has been gradually deteriorating for decades, so it’s not surprising that many people are complacent. They’ve long heard about the debt problem, and nothing has happened. However, it is now reaching the tipping point.
That’s because the US government is now borrowing money to pay the interest on the money it has already borrowed. Politicians are adding more debt to solve the problems of prior debt. It’s creating a self-perpetuating doom loop. It will result in the total debt growing not linearly but exponentially.
The debt increases at a faster rate over time because it is compounding. Each calculation period adds more interest to the total amount owed, which requires more borrowing and causes a larger interest expense.The inflection point—where the growth accelerates and spirals out of control—occurs near the end of the process. It’s when the effects of exponential growth become dramatically evident.
Similarly, the US government’s debt has grown steadily over decades but is now rapidly increasing. The US is near the inflection point where the debt growth will accelerate and explode into previously unimaginable levels. I think he is correct, and that has enormous implications.
Below is a chart of the US federal government’s interest expense. The inflection point at the end of the chart is clear.
Unfortunately, most people have no idea how bad things can get when their government goes bankrupt, let alone how to prepare. We will likely see incredible volatility in the financial markets that could decimate many ordinary people’s life savings and retirement assets.
But I’m not just talking about a stock market crash or a currency collapse…It’s something much bigger… with the potential to alter the fabric of society forever. It’s created an economic situation unlike we’ve ever seen before, and it’s all building up to a severe crisis on multiple fronts.
A great deal of commercial, domestic and speculative energy is spent pondering the future of the rand. Yet past experience tells us the foreign exchange value of the rand will remain highly variable and unpredictable. The best prediction for tomorrow’s exchange rate is today’s rate, but with a high level of variance that increases with time.
As in the past, the rand is unlikely to be a one-way bet. It will experience periods of negative and positive turbulence. On average, persistent rand weakness is expected in the currency markets due to the higher inflation and sovereign risk of SA relative to the dollar and other hard currencies.
The rand cost of a dollar is priced to rise at an average rate of 5.5% per annum over the next five years and by about 4.5% in 2024. Yet for all its volatility, changes in the foreign exchange value of the rand can be almost fully explained by two persistent influences. These are the exchange rates of other emerging market currencies with the dollar and the dollar prices of the industrial metals that SA exports.
Since 2010 daily movements in the emerging market currency basket explain 54% of daily movements in the rand-dollar exchange rate. This is a highly significant association. If you had a crystal ball that foretold future emerging market basket-to-dollar rates, you could make confident and profitable bets on the trajectory of the rand’s exchange rate.
Unfortunately, exchange rates are random walk processes that are impossible to precisely predict. And commodity prices also follow a random walk process. Your best guess for tomorrow’s rand-dollar exchange rate is today’s rate plus or minus 1% (and about 2.2% if you’re looking a week ahead).
However, knowing why the rand behaves as it has is not much help to predict where it is heading. Forecasting the dollar-rand exchange rate demands an accurate forecast of the dollar value of other emerging market currencies and metal prices.
This is clearly a formidable task. A strong dollar, as measured against its developed economy peers, will enforce weakness in emerging market currencies and the rand, and probably also weigh on metal prices when expressed in dollars, and vice versa.
The major force acting on metal prices will be the state of the Chinese economy — the major destination for industrial metals — and so it is another known unknown with relevance for the rand.
The other forces acting on the rand are SA-specific events, political shocks and own goals that move the rand irregularly and unpredictably one way that may then be reversed. These shocks account for up to 46% of the movement in the rand relative to other emerging markets.
This is where wise economic policy and effective implementation of those policies can positively influence the exchange rate. The persistently weaker bias of the rand when compared not only to the dollar but to other emerging market currencies, is due to the failure of the SA economy to deliver meaningful growth and attractive returns.
The rand is riskier than the emerging market basket to a significant degree. A drop of 1% in the basket typically translates to a 1.5% drop in the rand. The government’s job is not only to shoot fewer own goals, but to convince through positive, co-ordinated action that SA is not significantly riskier than other emerging markets.
The potential gains are a less risky rand, a lower cost of capital, greater investment, job creation and more wealth for the country to share.
• Kantor is head of the research institute at Investec Wealth & Investment, and Holland a co-founder of Fractal Value Advisors. They write in their personal capacities.
By JP Landman
Over the holiday period, there were several important developments regarding the major issue facing the country: electricity.
By far the most important was the release of the long-term electricity plan, the Integrated Resource Plan 2023 or IRP 23. This is a still a draft. After public comments, it will be gazetted to replace IRP 2019. Even as a draft, it is a wholly unsatisfactory document that lets the country down in a crucial area of development. More about that later.
The government also announced three bid windows for 5 000MW of renewable energy, 2 000MW of gas, with another one for 1 000MW of gas, specifically in Nelson Mandela Bay, to come later in the year as well as 615MW of battery storage.
A request for proposals (not a bid window) for 2 500MW of nuclear power is also envisaged for 2024. A nuclear power station takes 10 to 15 years to develop. This will not make any difference between now and 2030 and we will revert to the issue once the proposals are in and we know what is at stake.
Another important piece of information came from energy analyst, Chris Yelland. Based on Eskom data, he calculates that the utility’s energy availability factor (EAF) declined from 58% in 2022 to 54.7% in 2023. This is a stark summary of the relentless decline at Eskom and makes a mockery of EAF targets of 65% and 70% set at various stages by management and politicians.
The IRP comes to the bleak conclusion that, even with new capacity (including 3 000MW gas from Eskom), load shedding can be expected to continue into 2027. Publishing a “plan” that includes load shedding for another four years can only be called negligent planning. Common sense dictates that such a plan must set out a path towards plugging the supply deficit and eliminating load shedding.
The prognosis of load shedding continuing until 2027 is premised on a very realistic EAF of 49% to 51%. The only scenario in IRP 23 where load shedding is overcome, is with an EAF of 66% to 69%. Given the trend in Eskom’s EAF, that is clearly wishful thinking.
Relief from load shedding can only come from new investments. This is where IRP 23 really lets the country down.
There is general agreement that South Africa needs 60 000MW of new capacity over 10 years – about 6 000MW per year. The Presidential Climate Commission, for example, recommended 50 000 to 60 000MW of new renewable capacity over 10 years, plus 3 000 to 5 000MW of new gas. But for the seven years to 2030, IRP 23 only provides for a total of 28 000MW to be added, leaving a shortfall of 22 000 to 32 000MW. For a country in an electricity crisis, this is wholly visionless and without urgency.
Inexplicably, IRP 23 does not include the 5 000MW renewables from Bid Window 7, released in December. It also does not include 5 000MW from a future Bid Window 8, which the minister still has authority to issue. That will cut the deficit by 10 000MW.
IRP 23 also states that more solar and wind power from the private sector is expected to be connected after 2027, but does not bring any numbers into the plan. This week, Nersa revealed that, in 2023, nearly 4 500MW new capacity were installed across 392 plants. A log we keep of private projects announced in the media comes to about 11 000 MW to be added in the next three to four years. Incomplete as the log may be, one cannot just ignore the private sector contribution.
IRP 23 – renewables, gas and coal
Of the 28 000MW of new capacity over the next seven years, which the IRP foresees, 69% will be renewables (wind & solar), 21% gas, 5% dispatchable capacity (essentially storage capacity in whatever technology) and 5% coal.
The 5% for coal refers to the last two units at Kusile and Medupi that will come online during the IRP period. Essentially, there is no new coal. Two 750MW coal plants provided for in IRP 2019, which the minister never activated, do not reappear in IRP 23. The IRP notes that the GeoScience Council and World Bank are undertaking a study at a site in Leandra in Mpumalanga to explore clean coal technologies. Should such technologies indeed be developed, coal could feature again in the period after 2030.
Although it is in IRP 23, I excluded from the 21% gas calculation 1 200MW of gas from Karpowership. The day after the IRP was released, Eskom announced that it had cancelled the transmission grid capacity reserved for Karpowership and two other providers as they could not reach financial closure for their projects by 31 December. Hopefully, this is the end of the inappropriate Karpowership deals, even though the IRP draft still includes it.
Another example of reality outstripping the plan is the provision for 3 000MW gas from Eskom. Industry insiders put the cost of that project at R30 billion and more. However, the R254 billion Treasury bailout of Eskom prohibits any further capex, apart from essential maintenance. It also prohibits further debt taken on by Eskom. It is unclear how the drafters of IRP 23 think the Eskom project will materialise.
As the IRP now stands, it is already outdated on this 4 200MW of gas. Presumably, that would be fixed in the final draft.
Missed opportunity to spur re-industrialisation
At 69% of new capacity, renewables dominate the bid windows. Sadly, that is not enough.
Quite apart from the fact that 32 000 more MWs are needed, the miserly allocation for renewables undermines industrial development.
In 2024, for example, IRP 23 envisions only 1 000MW of solar renewables to be installed; in 2026 only 1 040MW; in between, in 2025, there is a spike to 3 000MW. With such a limited and fluctuating uptake, how can industrialisation and localisation of renewable power components take place?
If we play our cards right, green energy can play a huge role in re-industrialising the country. The opportunity is right in front of us, but who will build a factory to produce solar panels or wind components if uptake is going to be so limited and fluctuating? We learnt that lesson when Brian Molefe suspended renewable energy contracts in 2016 and a solar panel factory in KZN had to close down.
Now what?
There is one big difference between IRP 2019 and IRP 2023, and this is the regulatory context.
The changes announced by President Ramaphosa in 2021 and 2022 created a liberated electricity market where private players can do their own thing, irrespective of what the minister publishes in an IRP. Over the last two years, we have seen private players, from households to big corporates, using this freedom to create their own supply. Traders and energy exchanges are also emerging to buy and sell power, further expanding supply and consumption.
Over the last year, many companies have started embracing renewable power, partly to beat load shedding, but also to move towards being carbon neutral. Anglo American SA, for example, are aiming for 5 000MW of renewable power by 2030, to be carbon neutral by 2040; 5 000MW is as much as a whole government bid window. Similar stories are unfolding at many other companies.
Even the country’s biggest coal producer, Exxaro, will not invest in more coal assets and are rather hunting for renewable assets. Earth & Wire, a private sector “utility”, has already signed agreements to provide many thousands of MWs to various buyers. The genie has left the bottle.
Reflexivity, the theory that an action carries in it a counteraction, is also at work here. The more IRP 23 states that load shedding will continue to 2027, and the more it works with unrealistic gas assumptions, the more people will note the failures and make their own arrangements.
It would be better if there was one national plan that mobilised the public and private sector to play their respective roles to eliminate load shedding and undertake the long-term development of the energy sector. But IRP 23 is not that.
So, we will have to rely on private sector initiatives to get us over the line. This is happening.
Transmission capacity
The transmission grid is still a concern, but fortunately also a priority, both in terms of money and attention.
National Treasury has signed two agreements with European lenders for concessional loans to be used for transmission expansion. The terms of the government’s bail-out of Eskom for R254 billion are creating a bottleneck now, because of the prohibition on capex programmes mentioned above. That, of course, impacts investment in transmission. The new National Transmission Company, for whom a new board was announced this week, will be fully operational from 1 April, and the European money will probably go to that company to proceed with expanding transmission.
Eskom Transmission currently envisions that 1 675km of new lines will be built by 2027 and 12 500km thereafter. Power Operations & Leadership Association of Southern Africa (Polasa), an industry organisation, has called this a “famine and feast” scenario and argued for some of the projects to be brought forward.
Electricity Minister Kgosientsho Ramokgopa, who was recently given responsibility for the transmission network, acknowledged the problem in his first news conference of the year. He set a goal of building 6 000km over three years and said he had a mandate to look for private capital to co-finance that.
Economic impact
Due to electricity and logistics constraints, 2024 will again be a tough year economically. Nobody is expecting the economy to grow at the population growth rate of 1.8%. This means that 2024 will be the 11th year in which the economy grew more slowly than the population and the country is getting poorer. We already have a decade of declining per-capita incomes behind us.
That, of course, impacts unemployment, poverty, the ability of the government to collect taxes, having sufficient resources for development. It affects everything. Electricity must be resolved, and logistics cleared. Only then can the country again enjoy a rise in per capita incomes.
So what?
By John Mauldin
Having now spent almost six months describing the historical cycles and massive debt that surround us, I find myself looking for an “easy” exit. Maybe one exists, but I haven’t found it yet. I think we’re stuck. The building will have to collapse around us before we can leave.
This is obviously not a great situation. For one thing, if we don’t plan properly, the building could easily collapse on us instead of around us. Our entrapment may also cause us to neglect other big problems and maybe miss important opportunities.
The sad fact is we have no easy way out of the debt situation. Worse, we are actually choosing this fate. It’s not about individual choices; none of us want the crisis that’s coming. But all the solutions require joint actions we are apparently unable to take. Which means we are, by default, choosing a path which for many will be catastrophe.
We face this not just because of US government policy choices but the political process itself. It is a function of the two-party system. Our system has lost the ability to act decisively against big problems we all see coming. We are a nation of deer in the headlights.
But our system won’t stay paralyzed forever. At some point, we’ll see action because the crisis will have become impossible to ignore. Then we’ll respond. It will be a furious, poorly planned response with massive side effects that could have been avoided unless some of us begin thinking about possible solutions in advance.
Melodramatic? Hyperbole? Let’s rewind the clock to 2008 when then-Treasury Secretary Hank Paulson literally got on his knees to House Speaker Nancy Pelosi, begging her to authorize the bailout for the banks. The system was getting ready to collapse. The plan was poorly thought out, but that is my point. No one really “war-gamed” the possible solutions and choices in advance. Rather, with leaders on both sides of the aisle staring into the abyss and realizing there was no bottom, they made the best choices they could in a very short time.
Now we have an approaching debt crisis we can actually think about in advance. I believe—and hope it’s not just my naive optimism—we will have some time to consider solutions. And as I have been saying for years, nobody will be happy. We have gone way past the time for relatively easy fixes. Having cut taxes and increased spending, we are running almost $2 trillion deficits annually.
As we will see below, when I suggested part of a future compromise, I got serious pushback from readers on both sides. And the irony is I understand the frustration. Viscerally. I agree that everything that I have suggested in the past few weeks and months are bad choices. But in the future, the worst choice will be doing nothing and letting the economy collapse around our ears. Some might come through it, but the vast, vast majority of us won’t.
That’s not the future I want to predict, but I see no other possibilities. I think we have a few years left but there are already mutterings of stress in the US bond markets.
Then again, perhaps the denouement will take longer than I think (Japan?), but it will arrive. Today we’ll talk about why.
Mathematically, balancing the budget is no great mystery. We know what to do: cut spending and/or raise revenue until the two sides match. But that’s where it all breaks down. No one wants their favorite spending programs reduced or their taxes raised.
This was evident in my letter last month describing a possible value-added tax (VAT) system. It drew far more responses than I usually get, and they were mostly negative. The very idea of any new tax, even one paired with spending reforms and cuts to other taxes, outraged many readers. These are direct quotes from reader emails:
This isn’t a random sample of the population, of course, but I think the sentiment is common. Many people simply don’t trust elected officials to do what elected officials are supposed to do. They have good reason to feel that way, too.
Contrary to what a few readers think, I’m not on some ideological campaign to raise taxes. I would actually like to reduce income taxes and replace them with a VAT because consumption taxes are less economically distorting. And also cut a lot of spending. We could even have a higher VAT and eliminate Social Security taxes. There are lots of options and my preferences are just a few of scores of options. That is what compromise will look like.
Many said, in various ways, they would agree to new or higher taxes only after every possible spending cut had been tried. But no one specified what spending they would cut. At most, they alluded to vague “waste and fraud.” What is that? We have been trying to cut out waste and fraud for my entire adult life, and I’m sure we have done so in a few areas, but then we add other spending on top of it.
Worse, our decades of delay mean balancing the budget with spending cuts alone would require draconian cuts that would wreak havoc on the economy.
The experts at the Committee for a Responsible Federal Budget put a pencil to this last year. They found balancing the budget by 2033 with spending cuts alone would require immediately slashing 27% of all federal outlays. That would include defence, Social Security, Medicare, veterans benefits, law enforcement, border protection—everything.
Source: CRFB
That number rises quickly if you start exempting certain categories. Wall off Social Security, Medicare, defence, and veterans programs (plus interest on the debt!) and balancing the budget by 2033 would require 78% cuts to everything else the government does.
I am not here to argue everything the government does is helpful or productive. A great deal of it isn’t. Waste and fraud happen, too. But if you think such giant cuts wouldn’t cause enormous turmoil and side effects, I think you are sadly mistaken. Our entire economy is optimized to the assumption the government will always do certain things.
For example, if you think air travel is miserable now, wait until they fire 8 out of 10 TSA agents and air traffic controllers. Do you really think the air traffic would be safe in today’s environment without TSA? Trust me, after millions of miles in the air, I get the frustration with TSA more than most. Yes, we could raise airline ticket fees to pay for the TSA. Maybe we should. But that’s just one small example. There are literally scores of other things we depend on the government to do effectively. Can the private sector do a lot of them? Sure. And that will almost assuredly be part of the solution. But it’s not something we can set up quickly.
What we need is a rational process of balanced, prudent, well-planned privatization, spending cuts, and tax reforms. That is nowhere on the radar right now. When the crisis comes, without some of us thinking about possible solutions, we’ll get the opposite: unbalanced, imprudent, and poorly planned.
And as bad as those changes will be, at that point they’ll be better than the alternatives. Just like 2008.
I have been saying this for a distressingly long time, long enough to be labelled “the boy who cried wolf.” And others were saying it years before I did. The coming debt crisis may be the most widely predicted one in history.
But here’s the rub: Wolves actually exist and, given the opportunity, can hurt you badly. There is no doubt the debt exists, and that our ability to sustain it is steadily declining. Anyone paying attention to political news, no matter what side you’re on, can see we’re doing nothing to change course. I don’t feel like I’m crying wolf. But I’ll admit to being early. Timing is hard.
For example, here’s a quote from my May 7, 2011, letter titled Muddle Through, or Crisis?:
“I think we have two choices as a country. We can elect to deal with the deficit proactively or wait until there is a crisis and react. And make no mistake, there is an approaching Endgame, with regard to how much debt the market will let us have. We don’t know that point now, but if it happens it will be quite a ‘surprise!’
“… Let’s assume we do not deal with the deficit in any meaningful way. Eventually the debt will rise to epic, Greek proportions. The bond vigilantes arise from the dead and start to push up interest rates. Interest as a percentage of government spending rises, crowding out other government expenses or increasing the debt still further.
“Then we have a crisis. We are FORCED by the bond market to get the deficits under control, but now we are doing so in a crisis. Health care will have to be slashed by far more than it would in a more controlled scenario. Tax increases will be brutal. You think Social Security is untouchable? Not in this crisis world. Means testing and spending freezes will be the rule of the day. Military cuts will seem draconian. Our allies who depend on us for a defence shield will not be happy. Federal education spending? Not all of it, but some of it will be on the chopping block…
“What’s my basis for this? History. This movie has played over and over again in various countries in modern history. While we may be the world’s superpower, we are not immune from the laws of economic reality.
“In such a scenario, I expect QE 4-5-6. Could the Fed literally monetize the debt and then “poof” it? When our backs are against the wall, don’t assume that what has been seen as normal will be the reigning paradigm.”
I wrote that almost 13 years ago and I stand by every word today. Crisis is coming. If we had taken some relatively modest steps to avoid it when I wrote those words, we would be in a better position now. We didn’t… so here we are.
The most frustrating part is this could all have developed quite differently. As recently as 2001 the federal government had a budget surplus. Revenue was actually about $133 billion more than spending that year. There were smaller surpluses in 1999 and 2000. They resulted from a unique set of circumstances: the strong 1990s economy, low interest rates, and bipartisan tax and spending reforms. Bill Clinton and Newt Gingrich, realizing neither would get anywhere without the other, worked together and (trigger warning!) compromised to get some of what each wanted.
Alas, this brief period of sanity ended after 2001. Had it continued we might have slowly paid down the debt. Fantasy? No, not at all. CRFB issued a report last week showing what might have been. It’s long but well worth reading.
“In 2001, the Congressional Budget Office (CBO) projected that the national debt would effectively be paid off in full by the end of Fiscal Year (FY) 2009. Instead, federal debt held by the public grew from 32 percent of Gross Domestic Product (GDP) at the end of FY 2001 to 98 percent of GDP at the end of FY 2023.
“Reviewing major deficit-increasing legislation and executive actions over the past 22 years, we find that major tax cuts are responsible for 37 percentage points of debt-to-GDP, net discretionary spending increases and major Medicare expansions are responsible for 33 percentage points, and response measures to the Great Recession and the COVID-19 pandemic and recession—before accounting for economic feedback—explain 28 percentage points.
“Absent any two of these sets of policies, the debt-to-GDP ratio would be near the FY 2001 level. Absent these tax cuts, spending increases, and recession responses, debt would be fully paid off.”
Source: CRFB
John here again. It’s fair to wonder what skipping the “recession responses” would have done. Certainly, some of the spending was excessive and even counterproductive. But leaving millions to fend for themselves in a crashing economy might not have worked out so well, either. Even so, simply omitting the other spending increases and tax cuts over this period would have us in a far better position now.
(Note: More than a few readers observed that debt-to-GDP is more than 98%. When the CRFB and most budget analysts talk about debt-to-GDP, they use “debt held by the public,” not counting the Social Security trust fund and similar arrangements. The all-in debt-to-GDP ratio is 122%, as tracked by that wonderful website USdebtclock.org.)
Source: US Debt Clock
CRFB looked specifically at the tax and spending bills that account for the debt growth and found it was mostly bipartisan.
“Of the policies we reviewed, 77 percentage points of debt-to-GDP can be explained by legislation with some meaningful level of bipartisan support. Highly partisan Democratic actions explain 12 percentage points, and highly partisan Republican actions explain 8 percentage points. Manybipartisan actions extended policies that were originally more partisan in nature.”
Source: CRFB
John here again. Let me repeat that: CRFB finds 77 percentage points of the current 98% (122%) debt/GDP ratio can be attributed to legislation that passed with strong bipartisan support. That means the politicians were probably confident their voters would like it.
All this legislation was also scored by the CBO, so representatives and senators knew (roughly) what it would do to the debt. They did it anyway.
More debt growth is coming. Eventually, as I explained in that 2011 quote above, the bond market will stop absorbing it… and then we’ll have the crisis that forces change. I am hearing from my sources that the primary dealers who are responsible for buying US Treasury debt are beginning to wonder how they will absorb $9 trillion worth of debt this year? Yes, 80% of that will be rollover so should be manageable but at some point…?
Worse, there is a strong chance this debt crisis will coincide with the kind of cyclical social crisis I’ve described in this series. Neil Howe, George Friedman, Peter Turchin, and Ray Dalio (among others) have all warned us it will be bad. Add a debt crisis on top? We’d better buckle up.
We will get through it. We always do. But at what cost?