South Africa economic outlook: April 2023

The National Treasury’s baseline forecast, released on 22 February 2023, expected a moderate deceleration of growth to 0.9% in 2023.⁸ The forecast by the South African Reserve Bank (SARB) toward the end of January 2023 was less optimistic, at 0.3%. This figure is based on the key assumption of more than 250 days of loadshedding, and with longer blackouts, for 2023, which, the SARB believes, will likely shave off up to two percentage points of GDP growth this year.⁹ The bank marginally revised down the growth outlook to 0.2% at the end of March.¹⁰

The International Monetary Fund (IMF) slashed its 2023 forecast from 1.2% as per its January’s update to a meagre 0.1% on 23 March 2023,¹¹ on account of intensified power shortages and an uncertain global environment.

Furthermore, given lower net exports due to logistical bottlenecks, the easing of commodity prices, and higher power-related imports, the current account deficit is projected to bulge from –0.4% of GDP in 2022 to –1.8% of GDP in 2023 and –2% in 2024.¹² In a possible upside scenario where capital expenditure is “front loaded,” and where the resolution to the energy crisis is fast tracked by creating a stable supply of electricity (which would further increase the current account deficit as most of the capital goods would require to be imported), growth over the medium term would still not average 2% per annum, as per National Treasury.¹³

Indeed, as banks in key advanced economies pull back on lending due to headwinds from the failure of three mid-sized banks in the United States and Zurich-based Credit Suisse, amid already low business confidence and tight financial conditions,¹⁴ it could see a faster slowing of economic activity in South Africa’s key trade partners. This, together with soft commodity prices, gives further impetus to a “no growth” scenario for South African economy in 2023.

Furthermore, employment still running below prepandemic levels and elevated poverty and inequality are causes of concern in terms of social stability for a country going into an election year (national elections are due in the second quarter of 2024).

Consumers remain under financial strain, businesses exposed to higher costs

Increased global food and fuel prices have sent inflation rates over the SARB’s inflation target band of 3%–6%. For the first time since headline inflation reached a 13-year high of 7.8% in July 2022, headline inflation recorded a slight increase in February, from 6.9% YoY in January 2023 to 7% that month, reflecting sticky food prices (increasing by 13.6% over the past year) and price pressures exerted by loadshedding.¹⁵

South African consumers are under a lot of financial strain. At the end of February 2023, the Deloitte South Africa Consumer Tracker highlighted that 41% of consumers feel that their financial position has worsened over the past year¹⁶ and are concerned about their financial circumstances. Given the rising cost of food, based on the data, consumers are not only making greater trade-offs (such as purchasing lower-cost meat, buying more store brands and less costly ingredients), but are also being more frugal (mostly saving by reducing food waste, buying only essentials, and buying less than they want). The FNB/BER consumer confidence index (CCI) tumbled to –23 points in the first quarter of 2023 (from –8 in Q4 2022). This is the third lowest CCI on record since 1994, with likely repercussions, for example, on lower durable goods items sales this year.¹⁷

With loadshedding expected to continue into at least the second half of 2023, consumers are likely to face more price hikes, as retailers and consumer goods companies spend more on power back up, increasing the cost of doing business and, thus, exerting additional pressure on input costs. Similarly, many higher-income households have already started investing in backup and renewable power solutions, or they are likely considering these options given the recently announced tax rebate for the fiscal year 2024, which requires making certain purchasing trade-offs.¹⁸

The SARB has been relentless on its course to combat inflation with its ninth consecutive interest-rate hike at the end of March 2023. While markets and economists expected an increase of 25 basis points (bps), the bank deemed the risks to inflation to be on the upside, with food price inflation as well as core goods inflation expected to be higher than previously anticipated this year. Of concern has also been the heightened risk profile of economies, such as South Africa, that need foreign capital to finance the increasing current account deficit, given tighter lending conditions globally.¹⁹

This will place greater pressure on middle-class consumers and soften consumer demand, with tighter lending conditions dampening investment decisions and hiring for firms, and ultimately the growth outlook. Together with business-continuity issues (loadshedding, most prominently) this is likely to impact margins and profitability of the private sector in the coming months, which could see spillovers to the fiscus, for example, through lower corporate income taxes.

Fiscal consolidation continues, but debt deteriorates due to intervention at national utility

On a positive note, South Africa’s minister of finance in the February-read Budget announced that the country would continue on the path of fiscal consolidation. This entails limiting growth in consumption expenditure, while reducing the budget deficit without resorting to tax hikes, infrastructure investment cuts, or impacting the social wage. Indeed, the latter continues to be a spending priority, making up 60% of noninterest expenditure over the next three years for the country.²⁰

Given that tax collection exceeded last year’s budget expectation—largely due to more efficient and effective tax administration and collection—the consolidated budget deficit is expected to decrease to 4.2% of GDP in 2022–23, 4% in 2023–24, and 3.2% in 2025–26. This is despite an average annual increase of 4.5% in consolidated expenditure over the next three years. A primary budget surplus is still expected for 2023–24.

However, implications of the government’s decision to provide debt relief to Eskom, the national power utility, will see the country’s gross debt-to-GDP ratio deteriorate, given the need for increased government borrowing and, thus, public debt. This debt-relief arrangement will see the government take on more than 50% of Eskom’s debt over three years, to free up resources for the utility to unbundle and invest in new power-generation capacity and maintenance activities, although based on strict conditions. While debt levels, following previous year’s revenue windfall, were expected to stabilize as early as 2022–23, this is now only expected to occur in three years’ time, at 73.6% of GDP in 2025–26.²¹ This also makes the country’s public debt-to-GDP ratio one of the highest among emerging markets.²²

Taking on the debt of the struggling utility will also see a rise in the debt-service costs—which remains among the fastest-growing expenditure items in the country’s budget in the medium term, while continuing to crowd out other expenditure.²³

Navigating a perfect storm

The year 2023 could be a perfect storm for South Africa if various global and domestic risks materialize. Domestically, addressing wide-ranging (and often self-imposed) challenges such as weak growth, mismanagement, and maladministration swiftly will be key to taking the brakes off the country’s dire growth outlook.

One issue that South Africa must address swiftly is the grey listing of the country by the Financial Action Task Force (FATF) in February 2023. While this is not expected to have permanent effects on the growth outlook, it could imply potential risks such as reputational damage, increased transaction costs for businesses (already faced with an environment of high input costs), and negative impact on foreign flows, posing additional burden on the already struggling economy.

The grey listing was largely expected and priced into markets, and on a positive note, given South Africa’s globally integrated and resilient financial system, it is likely that the country will bounce back from the grey listing quickly (possibly in the next 12 to 24 months) . This would impact much-needed financial inflows (particularly foreign-direct-investment inflows). Significant progress has already been made in addressing some of the concerns highlighted by the FATF.²⁴

Furthermore, following the trouble in the banking sector globally, as mentioned earlier, a slowdown in key trading partners could be more pronounced than recently expected in 2023. This comes as lower business confidence and tighter financial conditions transpire in these economies. Besides short-term swings in investor sentiment, the direct repercussions on South Africa’s financial system, however, are likely to be limited, given the sectors’ resilience, supported by strong financial sector oversight and by banks that are in good capital positions and well managed.²⁵ Nonetheless, the sentiment swings have seen a sharp depreciation of the rand, adding to the general weakness of the local currency over the past year and have in part fueled the higher–than–expected rate hike recently.

Lastly, there is much underway to address the power outages urgently to pave the way for better growth outcomes in the medium to long term. The government has established the National Energy Crisis Committee, appointed an electricity minister, and is taking on debt from Eskom to free up resources at the utility. The government has also continued with programs such as Operation Vulindlela to drive reforms and introduced rooftop solar incentive programs for households and broadened those for businesses. The latter includes a one-year tax relief, estimated to be up to R13 billion,²⁶ not only to reduce pressure on the national power grid and increase electricity supply but also to support the transition to clean energy.

Plans to address the logistics crisis are also underway, as seen with the recent government announcement to develop a road map for government–owned rail and port operator, Transnet. The plans coordinated under Operation Vulindlela include upgrading rail and ports infrastructure, increasing the number of goods transported by rail, and enabling private sector investment—all intended to reduce supply-side constraints to growth, improve the country’s competitiveness, and boost growth.²⁷ Government has also announced R903 billion in infrastructure investment plans over the next three years which, if successfully implemented, will boost growth.²⁸

Besides prioritizing a swift resolution of the country’s electricity crisis, avoiding the risks of slow growth for longer will require urgent action in eradicating inefficiencies at notable state-owned entities, especially in the transport and logistics sector, while hastening the implementation of much-touted growth-enhancing structural reforms. Apart from reforms in network industries, these also include reforms in the labor market and education sector, rooting out corruption and mismanagement, lowering crime levels, and ultimately building confidence among consumers, business, and the broader international investment community to unlock investment and new opportunities for growth and job creation.