South Africa’s economy – a year into the Covid-19 pandemic
South Africa’s growth: In line with what transpired globally as the Covid-19 pandemic resulted in both a worldwide health crisis and widespread economic crisis, the South African economy experienced a deep contraction of 7% in real GDP in 2020. Yet, a number of tail winds, including fewer restrictions on economic activity and the fact that economic growth will be coming from a very low base, will push South Africa’s economic recovery in 2021. We expect real GDP to recover by 3.5% in 2021.
Capital inflows and the South African exchange rate: Subsequent to the exit of significant capital on account of credit rating downgrades and heightened risk aversion associated with the Covid-19 pandemic, net purchases of bonds by non-residents once again became positive from November 2020. Similarly, although the South African exchange rate had depreciated markedly during H1-2020, its appreciation (against the US dollar) has been strong relative to its peers. A downside risk to the rand’s exchange rate comes from the possibility of developed countries’ central banks beginning to tighten policy on the back of improving economies and rising inflation rates.
Mining sector and commodity prices: Several factors are responsible for the performance of the mining sector; one of the critical ones is the perception of a country’s policies related to the sector, and South Africa’s policy perception index has improved since 2018. In spite of volatile production, the mining sector is being boosted by the strong rally of commodity prices. Demand will likely remain robust as the global economic recovery gathers momentum.
Business confidence: South Africa’s business confidence deteriorated during the first quarter of 2021. The persistent low business confidence will continue to be a deterrent to investment. while the downturn in economic confidence points to structural systemic weaknesses underlying the anticipated economic upswing in 2021.
Employment: South Africa’s chronic unemployment deepened even further as the Covid-19 induced economic crisis resulted in substantial job losses. 8.3% fewer individuals were employed during the fourth quarter of 2020 relative to the first quarter of the year. We expect the number of people employed to improve along with the rebound in the economy in 2021, but South Africa’s high unemployment rate will remain a problem until concrete structural changes are implemented and sustained over time.
Inflation: In March 2021, the consumer inflation rate rose above the lower band of the Reserve Bank’s inflation target range but was still well below its mid-point of 4.5%. Core inflation, which excludes food, non- alcoholic beverages, petrol and energy, was significantly lower than headline CPI in March 2021.
Interest rates: With inflation remaining benign and the economy still languishing under the effects of the Covid-19 pandemic, the South African Reserve Bank has retained its accommodative stance. There is a likelihood that the Bank might hike the repo rate by 50 basis points before year end, particularly as its inflation forecast for 2021 has risen.
Fiscus: Net borrowing requirements increased markedly as pandemic expenditure stretched the already constrained government finances even further. A substantial net issuance of long-term government bonds was used to finance the higher government net borrowing requirement, and this was primarily financed in the local financial markets. Meanwhile, this led to a sharp rise in government gross loan debt.
Corruption: Even though the Ramaphosa administration has been laying the groundwork for anti-corruption efforts, it appears that it has been harder to go after the corrupt high ranking African National Congress (ANC) members. With ANC Secretary General Ace Magashule’s deadline to step down from his position because of corruption having passed, should he fail to do so, how the ANC deals with his non-compliance will be telling about how far it is able to fight corruption, as well as about President Ramaphosa’s authority within his own party.
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