South Africa economic outlook, May 2024
With unemployment, loadshedding, and a weak economy being front-line issues in the upcoming elections, the incoming administration must drive investment and reform to restart growth, build confidence, and help South Africa’s economy meet its potential.
Despite recording the worst year of loadshedding1 on record (so far) in 2023 (more than 6,700 hours of loadshedding were recorded in 2023,2 compared to about 3,700 in 2022),3 South Africa managed to avoid a technical recession. Real GDP growth stood at 0.6% last year.4 In the first half of 2023, businesses and households alike invested in self-generation and rooftop solar power, boosting investment spending, and aiding to bridge energy shortfalls. But household final consumption expenditure growth has been flat, given 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.
Of the 10 industries reported on by Statistics South Africa (StatsSA), four saw contractions in 2023, while three recorded marginal positive increases (less than 1%). Only the finance, transport, and personal services sectors grew more than 1%—by 1.8%, 4.3%, and 2%, respectively.5 Furthermore, business sentiment has been flat as companies juggle multiple challenges, including high costs of business, high lending rates, noteworthy power and transport constraints, as well as policy and political uncertainty linked to the upcoming elections, among other things.
In February 2024, South Africa’s National Treasury forecast in its budget review of 2024 that GDP growth will reach only 1.3% in 2024 and 1.6% in 2025,6 a more optimistic projection than the outlook for South Africa by organizations such as the International Monetary Fund (expecting 0.9% in 2024 and 1.3% in 2025).7 Nevertheless, South Africa’s growth outlook comes in considerably lower than that of the global economy, which is projected to grow by 3.2% for both 2024 and 2025 (figure 1).8
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. High domestic interest rates also dampen consumption expenditure growth.
However, the domestic growth outlook may turn around and improve if loadshedding is reduced and rail and port infrastructure constraints are resolved, given the results of initial reforms in these sectors, and if cost-of-living pressures are reduced due to moderating inflation and potential rate cuts toward the year’s latter half.
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.9
Consumers are expected to experience much-needed relief, as annual average inflation is expected to drop further from 6% in 2023 to 5.1% in 2024, 4.6% in 2025, and 4.5% in 2026 as per the South African Reserve Bank’s (SARB) latest forecasts.10 As major central banks—such as the United States Federal Reserve—start their rate-cutting cycle, initial small rate cuts in South Africa are also likely, and could support increased household consumption, boosting growth and consumer confidence. However, while these rate cuts were until recently expected toward the end of the third quarter of 2024 in South Africa, the latest SARB Monetary Policy Review released in April 2024 cautioned that “the path back to the [inflation] target midpoint has risen in recent months” and that “markets now expect South Africa’s policy rate to remain unchanged this year.”11
Furthermore, consumer confidence will likely remain low, largely due to high unemployment, but exacerbated by loadshedding and election uncertainty. In fact, top-of-mind issues for voters are unemployment, loadshedding, corruption, and crime,12 which have all taken a toll on the country’s growth performance for years.
On the supply side of the economy, various plans that have been set in motion to address supply-side constraints will need to be executed. Launched in 2020, Operation Vulindlela focuses on accelerating reform implementation within the electricity, rail, water, and telecommunication industries.13 Although some argue that these reforms are not ambitious enough14 and that momentum has been slow, there has been some progress.
For example, the recently passed Electricity Regulation Amendment bill, which intends to reform the country’s electricity sector, looks to promote competition in the energy sector by unbundling state-owned power utility Eskom, ushering in a decentralized, modern, and low-carbon energy system in years to come. While public consultations are still to be held in every province before the bill is signed into law (likely in 2025), it will take years to reconfigure the industry from its current poor state. Yet, there has been progress in the corporatization of the South African National Transmission Company this year, with the entity expected to start trading from July 2024 onward.15 Furthermore, 6,000-megawatt, large-scale projects worth 100 billion rand have been registered with the National Energy Regulator to become operational in the next few years.16
In response to the crisis in the transport sector, the National Logistics Crisis Committee was established, and the Freight Logistics Roadmap was developed with immediate steps to improve equipment and locomotive availability, network security, and broader logistics systems reforms. The immediate priority of the roadmap is to stabilize the operational performance of freight rail—currently a severe constraint most notably for commodity exports.17 Furthermore, the Economic Regulation of Transport bill is expected to be passed this year, promoting competition in the logistics industry and establishing the first transport regulator.18
The cabinet also approved the Draft Rail Private Sector Participation Framework to provide an interim approach to enable private sector participation, including third-party access to the freight rail network. While this is likely to be challenging based on previous attempts to include private operators in freight rail slots, private participation progress in ports has been seen, specifically at the Durban container terminal—Africa’s busiest container terminal. State-owned Transnet, which operates the national rail and ports infrastructure, recently announced the conclusion of the financial due diligence of the preferred bidder that will upgrade and manage Durban’s Pier 2 terminal.19
Also, in 2023, under the watchful eye of the National Treasury, a new management team was appointed at Transnet. This change was coupled with the sector roadmap to improve finances and operations, which included the sale of non-core assets and partnering with international and local companies to assist in the operation of elements of the ports (as noted before in this outlook).20
Linked to these developments, there has been increased emphasis by the National Treasury on efforts to professionalize public administration and improve governance of state-owned enterprises (SOEs), which should promote investment. National Treasury has penciled in 943 billion rand for much-needed public infrastructure investment over the next three years, half of which is allocated to public investments in energy, transport, and logistics.
By entity, 40% of the allocated 943 billion rand is expected to be invested by SOEs.21 While reversing operational challenges and overall inefficiencies and maladministration of SOEs will take time, the need to reform and ultimately fix SOEs is great. 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.22
The National Treasury is taking the lack of growth, slow reforms of SOEs (included in conditions for accessing bailout funding), and the pressured financial position of the country seriously. Debt sustainability and debt service costs are a case in point. The 2024 budget noted that, since 2012, real GDP growth has averaged 0.8% per annum and high debt service costs are choking economic growth by taking away spending from growth-enhancing sectors. For example, debt service costs are a greater share of the budget till fiscal 2026/27 than allocations made for social protection, health, community development, or economic development, with one in every five rands being spent on servicing debt.23
The February 2024 budget acknowledged the high budget deficit as a share of GDP, and introduced measures and reforms toward achieving a primary budget surplus, while also reducing borrowing in the medium term by drawing down 150 billion rand from the valuation gains of the SARB’s Gold and Foreign Exchange Reserves Account.24 The account is currently valued at around 500 billion rand, with the proposed effective “withdrawal” being 250 billion rand, and where 100 billion rand will be put aside as a contingency fund.
Tapping into these funds will help stabilize the government’s debt-to-GDP ratio in fiscal 2025/26 at a lower share of GDP (75.3% versus 77.7% as anticipated previously in the 2023 medium-term budget policy statement).25 Indeed, the 2023/24 fiscal year was the first since 2008/09 that a primary budget surplus was recorded, showing the National Treasury’s commitment to reducing the country’s debt burden. The budget deficit as a share of GDP is expected to narrow to 3.3% in the 2026/27 fiscal year.26 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.27
Given some of the constraints under discussion, but also stemming from various uncertainties such as heightened geopolitical tensions in the Middle East, climate change risks, still-tight financing conditions, and South Africa’s upcoming elections on May 29, there are notable downside risks to growth.
That said, addressing energy and infrastructure challenges, together with easing inflation and a commensurate lower interest rate environment post the incoming administration—hopefully one that implements reforms and works toward fixing what is broken—will help unlock confidence and South Africa’s economic potential. But a lot of hard work still lies ahead.