The South African economy on shaky ground beyond the post-pandemic recovery

SOUTH AFRICA - Forecast 15 Feb 2024 by Iraj Abedian

• Bonds: The South African bond market continues to be a reflection of the levels of confidence in both the country itself and as a member of the emerging markets group. At the same time, South Africa’s own homegrown economic weaknesses have been responsible for the bulk of the vulnerability in the country’s financial markets, including the bond market. The substantial increase in South Africa’s debt has been an important factor in the escalation in the country’s bond yields. This has especially been the case since the country’s reverse in fortunes as the price of its export commodities has largely moderated, which has had an adverse impact on government’s borrowing requirement. Nonetheless, there was a net purchase of the country’s bonds by non-residents in the first 11 months of 2023, as opposed to the net sale in the corresponding period of 2022. The government’s financing strategy comprises long-term borrowing in the domestic bond market.

• South African growth: Overall GDP growth for the first three quarters of 2023 was only 0.3% higher than the corresponding period in 2022 as economic activity remains lackluster. At the same time, the size of the economy is lower than the peak GDP reached during the third quarter of 2022 although it is still higher than the pre-pandemic peak recorded in the fourth quarter of 2018.

• Mining and manufacturing: While activity in both sectors remains constrained, both mining and manufacturing registered positive growth rates during Q4-2023 from their Q3 declines. And while mining’s rebound was somewhat sizable, it was only marginal for the manufacturing sector, but this bodes well for Q4-2023 GDP growth.

• Domestic demand: Similar to the insipid real GDP, domestic demand was muted during the third quarter of 2023. Downbeat business confidence in Q4-2023 suggests there was a continuation of sluggish business conditions into the final quarter of 2023. This is particularly so as demand remains dampened amidst what the Reserve Bank has also noted to be restrictive monetary policy conditions. In addition, although the levels of employment in the country continue to improve from their depressed pandemic levels over the past year, this has not been enough to support household demand amid the elevated cost of living as well as falling disposable income.

• Employment: The country’s chronically high unemployment rates remain one of the governing African National Party’s (ANC) main vulnerabilities as South Africans prepare to cast their votes in this year’s general elections. While unemployment moderated during the third quarter of 2023 from the second quarter, it remains above the 28.7% average recorded during the country’s previous general elections in 2019.

• Inflation: The current restrictive monetary policy stance of the South African Reserve Bank, along with factors such as lower fuel prices, have led to the moderation in South Africa’s inflation. Risks to the inflation outlook, however, remain, and the rand’s exchange rate weakness remains a significant risk.

• Interest rates: At its first meeting of 2024, the South African Reserve Bank's Monetary Policy Committee (MPC) decided to maintain the benchmark interest rate at 8.25%. With inflation showing signs of moderation and the US Federal Reserve signaling intention to commence rate cuts in 2024, we expect the South African Reserve Bank to follow suit, but only from H2-2024.

• The fiscus: As the 2024 Budget is presented later this month, it is likely to show that the health of the South African fiscus deteriorated substantially on the back of a change in fortunes regarding tax revenue from commodity exports as prices declined significantly. The underperformance of the economy will continue to limit the tax base, posing significant constraints on government revenue generation and fiscal sustainability. However, should the Treasury decide to increase taxes in Budget 2024 due to the current dismal state of government finances, economic growth would be negatively impacted, further dampening government revenue.

• Trade: Preliminary data released by the South African Revenue Service (SARS) shows a significant deterioration in the trade balance surplus recorded for 2023 as a whole relative to that registered in 2022.

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