How South Africa can reach its potential

 ·10 May 2024

South Africa’s economy is floundering, with government reforms and improved household consumption required to boost it.

In 2023, South Africa’s GDP only recorded 0.6% growth. Although this was not a technical recession, South Africa’s population growth is generally around 1.5% to 2%, meaning that South Africans are actually getting poorer.

According to Deloitte’s South Africa economic outlook for May 2024, household fiscal consumption expenditure growth in 2023 had been flat due to the high cost of living and the country’s energy crisis.

“This, together with heightened operational challenges in rail and port infrastructure, has been a drag on investment and much-needed growth both on the demand and supply side,” said Deloitte.

For 2024, expectations for South Africa are generally around the 1% mark, far lower than the 3.2% growth expected for the global economy.

However, household final consumption expenditure growth has been flat, given the high cost of living and the country’s energy crisis.

“For near- to medium-term growth, South Africa’s prospects remain constrained due to subdued export prices, low demand, a weaker rand, and the mentioned supply-side constraints to growth, together with high sovereign credit risks that increase borrowing costs and limit investment and growth,” said Deloitte.

“Domestic interest rates also dampen consumption expenditure growth.”

That said, the South African growth outlook could improve if load shedding is reduced and the rail and port challenges facing Transnet are improved, with initial reforms in these sectors showing early signs of promise.

Cost-of-living pressures could also ease due to moderating inflation and potential rate cuts in the latter half of the year.

“South African consumers experienced a substantial increase in the cost of living during 2023, which resulted in decreased savings in lower- and middle-income groups as consumers spent most of their incomes on necessities.”

“While headline inflation cooled down to 5.3% year on year in March 2024, it has continued to trend between 5% and 6% since September 2023, proving to be sticky, stubbornly high, and increasingly driven by services inflation as well as food, fuel, and, more recently, electricity-price inflation.”

That said, headline inflation is expected to moderate from an average of 6% in 2023 to 5.1% in 2024 and 4.6% in 2025.

With interest rates in the USA set to get cut later this year, the South African Reserve Bank (SARB) will likely follow suit, which should increase household consumption and boost growth.

However, question marks still remain when these rate cuts occur in South Africa, with many parts of the market not factoring in a cut this year amid sticky domestic inflation.

“Furthermore, consumer confidence will likely remain low, largely due to high unemployment, but exacerbated by load shedding and election uncertainty.”

“In fact, top-of-mind issues for voters are unemployment, load shedding, corruption, and crime, which have all taken a toll on the country’s growth performance for years.”

For instance, the recently passed Electricity Regulation Amendment Bill aims to reform the electricity sector by unbundling Eskom, which should allow for more renewable energy to come online in the coming years.

However, the bill still needs to still undergo public consultations and will likely only be signed into law in 2025. Even then, it will take years to reconfigure the industry from its current poor state.

Yet, the corporatisation of the South African National Transmission Company will take place this year, and there are 6,000 MW worth of projects that have been registered that should become operational within the coming years.

The government has also partnered with the private sector to create the National Logistics Crisis Committee, with the private sector soon being able to operate in the nation’s ports and rails.

National Treasury is also increasing efforts to professionalise the public administration and improve governance of state-owned enterprises (SOEs), with R943 billion pencilled in for critical public infrastructure investment over the next three years, with 40% going to SOEs.

“By entity, 40% of the allocated 943 billion rand is expected to be invested by SOEs. While reversing operational challenges and overall inefficiencies and maladministration of SOEs will take time, the need to reform and ultimately fix SOEs is great,” said Deloitte.

“Much greater capital investment is required, not just through delivery by the public sector, but with the intent of public-private partnerships and crowding in private investment, which will also require improved business sentiment. Gross fixed capital formation continues to trend below 15% of GDP—well below the 30% targeted in the National Development Plan.”

The National Treasury is also taking the country’s debt problems seriously, with the government taking R150 billion out of the country’s SARB’s Gold and Foreign Exchange Reserves Account (GFECRA) to pay off debt.

The GFECRA account will help stabilise the government’s debt-to-GDP ratio in fiscal 2025/26 at a lower share of GDP (75.3% compared to 77.7% predicted in the 2023 medium-term budget policy statement).

“To ensure that the change in government spending is sustainable, the long-term path will require a binding fiscal anchor to ensure spending stays within projected debt levels, and with lower debt servicing costs creating space for spending on more productive and growth-enhancing activities.”

There are still several notable downside risks to growth in South Africa, namely tensions in the Middle East, climate change risks, tight lending conditions, and the upcoming election on May 29.

However, addressing energy and infrastructure challenges, easing inflation, lower interest rates, and an administration that implements reforms and works to address the biggest issues facing the country should help unlock South Africa’s potential.

“But a lot of hard work still lies ahead.”

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