Big shift for South Africa’s economy – here’s what to expect next year

The Organisation for Economic Co-operation (OECD) says that South Africa’s fiscal and monetary policy are now turning contractionary – limiting the level of money supply for less spending and investment to slow the economy.
Researchers from the OECD analysed countries across the world to provide in-depth predictions and criticisms on policy, performance and more. The latest OECD Economic Outlook for November of 2022 reported that growth for South Africa is projected to be by 1.7% in 2022, 1.1% in 2023, and 1.6% in 2024.
According to the OECD, the commodity cycle boom boosted the country’s tax revenues. These windfall revenues have allowed the government to prolong the Social Relief Distress Grant until March 2024 and introduce temporary measures to cushion the impact of inflation without adding pressure on public finances.
The OECD said that debt remains above 70% of GDP, and rising debt-service costs already represent 15% of government spending.
“The fiscal stance is expected to be contractionary in 2023 and 2024 to consolidate public finances, achieved mostly by containing the public sector wage bill.”
Monetary policy is expected to continue tightening, with the policy rate reaching 7.25% in early 2023 and staying at that level until core inflation falls close to 5%, anchoring inflation expectations and limiting pressures on the exchange rate, added the OECD.
The organisation said that private consumption and investment would remain the main drivers of growth in the country, with household spending remaining supported by social transfers and an improving labour market.
Private investment will rise as companies replace an increasingly obsolete capital stock. Inflation is projected to fall slowly in response to tighter monetary policy, it said.
The OECD added that private investment would continue its recovery to pre-pandemic levels despite less favourable financial conditions, as capital stocks need replacement. Nonetheless, the price of South Africa’s commodity exports is expected to fall in 2023-2024. This will lead to a deterioration in the terms of trade and the current account balance.
In the coming years, growth will continue to be driven by the recovery of private consumption and investment, said the OECD.
“Social transfers, better employment prospects and falling saving rates should sustain private consumption, although attenuated by high inflation and tighter financial conditions in 2023 to 2024.”
Fiscal risk has eased thanks to a favourable commodity cycle, but debt-servicing costs are rising.
Redesigning tax exemptions would lower distortions, increase revenues, and improve equity, noted the OECD. Monetary policy should continue to tighten until inflation comes close to SARB’s mid-point target.
The global organisation said that broadening the base of corporate and personal income taxes by redesigning tax exemptions and raising property and environmental taxes would create fiscal space to finance growth-enhancing reforms while also improving the efficiency and equity of the tax system.
“The fiscal space should be used to improve the quality of energy, transport and telecommunications infrastructure, which would boost productivity growth and living standards.”
Global impact
Lower global growth will also weigh on exports in the near term, says the OECD.
Additional tightening of global financial conditions and the potential volatility of capital flows are risks to the exchange rate of South Africa’s rand.
“On the upside, if the recovery of international tourism outpaced expectations, this would provide additional support to growth.”
Stalling factors
Electricity shortages and more persistent inflationary pressures than expected will potentially delay the reduction of policy rates and create risks to growth.
The planned split of Eskom will proceed to allow other producers to compete and complement capacity while also bringing prices down.
Allowing private providers of renewable energy to feed power into the grid would, however help reduce electricity shortages while creating incentives for private investors to develop clean and cost-effective electricity generation capacity
Efforts to rein in the public sector wage bill and to address weaknesses in the management of public procurement and state-owned enterprises should continue.