Growth severely hampered by the energy crisis
In 2022, although economic activity slowed, it slightly outperformed expectations, mainly due to the resilience of agriculture and financial services. However, the outlook has considerably worsened, primarily because of the ongoing energy crisis resulting from the mismanagement of the state-owned power utility Eskom. Despite measures to address the crisis, President Cyril Ramaphosa declared a “state of national disaster” in February 2023. Still, load-shedding has significantly increased over the past five years, and is expected to worsen in 2023, with an expected equivalent of 200 full-day cuts compared with 157 in 2022 and 22 in 2019. This will have a broad-based impact on the economy, with electricity-intensive sectors such as mining, paper, metals, and retail being the most affected.
In addition, inflation, which peaked at 7.8%, is slowly decreasing but is expected to remain high through most of 2023, as the main drivers (fuel, food, electricity) will remain hot. A weaker rand, as investors’ confidence is low, is likely to fuel inflationary pressures on imported goods, including food. Inflation, combined with the high unemployment rate (above 30%), will weigh on households’ disposable income, and thus on consumption (66% of GDP). To tame inflationary pressures, the South African Reserve Bank, has hiked its benchmark repo rate by 425 bps since November 2021, to 7.75% as of April 2023. While the pace of rate hikes is likely to slow in 2023, interest rates will remain high, limiting growth in investment. However, it is expected to remain positive, as public infrastructure projects are planned - mainly in transport, logistics, water and sanitation. Net exports’ contribution will remain negative in 2023, as the decline in imports due to lower domestic consumption will be offset by a larger drop in exports, amid lower demand from key export markets (China, EU, US,) and production capacity constraints. A strong rebound in China in the latter part of the year could nonetheless benefit exports. The country’s exposure to climate risks remains very high, and the occurrence of extreme events is on the rise (for instance, the floods in April 2022 and February 2023), of which the materialization can significantly alter the outlook, notably through the potential disruptions on transport networks and the effects on the agricultural sector.
Fiscal challenges remain high, the current account deficit returns to a deficit
The country’s public deficit kept narrowing in fiscal year 2022/23, thanks to the combination of fiscal consolidation efforts (focused mainly on limiting the public wage bill) and higher-than-anticipated revenue collection in corporate and personal income taxes, and customs duties. The policy stance in the 2023/24 budget remains restrictive and focused on reducing the deficit. However, the worsening economic situation is expected to weigh on revenue. In the absence of new major tax proposals, deficit reduction will rely on expenditure staying within target, which seems unlikely as pressures to increase fiscal spending will remain high due to elevated social pressure to increase wages, while the energy crisis could lead to additional emergency spending. South Africa’s debt is mostly domestic (nearly 80%), denominated in rand and with long maturity. This makes it less vulnerable to risks associated with interest rates increases and currency depreciation. However, debt-service costs are high, absorbing about 16% of expenditure (or 5.2% of GDP). Furthermore, total gross consolidated public debt, which includes non-financial and financial corporations is close to 120% of GDP, and direct support to ailing SOEs might further increase the debt burden. For instance, the government has proposed a debt relief arrangement of ZAR 254 billion for Eskom (USD 14 billion, or 3.8% of GDP) out of the ZAR 350 billion that is publicly guaranteed, to be implemented between FY23/24 and FY 25/26.
After two consecutive years in surplus, the current account switched back to a slight deficit in 2022. It is expected to widen further in 2023. The trade surplus should continue to decline, as exports should decrease both in value (due to lower mineral commodity prices) and volume, and import prices (particularly food and fuel) remain high. The services deficit is not expected to improve, as tourism will likely be impacted by the energy crisis and transport costs will weigh. The secondary income deficit will be sustained by SACU transfers and foreign workers’ remittances to neighbouring countries. Extraordinarily high dividend payments on direct investments of mining sector companies in 2022 are expected to fade, leading to a slightly smaller primary income deficit. In turn, this would limit the deterioration in the current account deficit. Financing of the current account deficit will depend mainly on volatile portfolio investment, as investor confidence remains fragile. Foreign exchange reserves covered around 5 months of imports in January 2023.
ANC under considerable pressure
While the African National Congress (ANC) remains the dominant political force, its popularity has been steadily declining over the past years, with recent polls indicating support below 50%. President Cyril Ramaphosa, who has been in office since 2018, survived the “Phala Phala” misconduct scandal and managed to secure the leadership of the ANC ahead of the 2024 elections. Reform implementation has been slow during his term due to the important divisions within the ANC. The Eskom crisis, the strikes at Transnet in 2022 or the inclusion of South Africa on the FATF’s grey list in February 2023, illustrate the governance issues that the country faces. This growing political fragility is compounded by the population’s frustration.
In addition to structurally high unemployment, poverty, inequality and criminality, the population has had to deal with the erosion of their living standards due to high inflation and are also increasingly frustrated with regular power cuts (up to 12 hours of load-shedding a day). This could lead the ANC to lose its absolute majority in Parliament for the first time since 1994, although the opposition remains very fragmented. On the external front, South Africa can still count on stable relations with its neighbours, but the relations with the West are becoming more complex, as the government maintains a neutral stance in the Russia-Ukraine war. The joint naval exercises conducted with China and Russia in February 2023 have led to both domestic and international criticism from traditional partners such as France, the UK or the US, as it was perceived as a move towards closer ties with Russia.