Weak and constrained growth

The South African economy rebounded in 2021. This was primarily due to the favorable base effect and the boom in commodity exports, as COVID-19, the July riots, and the resumption of power cuts in the second half of the year further disrupted activity. In 2022, economic growth was expected to return to its usual sluggish pace. Domestic demand will be the main driver. However, household consumption (60% of GDP) will remain constrained by extremely high unemployment, a lack of hiring, low wage increases in the public sector, and a slowdown in consumer credit as monetary policy is tightened. In November 2021, responding to 5% annual inflation, the central bank hiked its key rate for the first time in three years, raising it by 25 basis points to 3.75%. Rates are expected to continue increasing with tighter U.S. and U.K. monetary policies. This will put pressure on the rand, which, added to high energy and food prices, will stoke inflationary pressures. Commercial banks will therefore be forced to raise their rates, even though their average prime rate was already 7.25% at the end of 2021. Public investment and consumption will be subject to fiscal consolidation, whether foreign or domestic, and private investment (13% of GDP with the general component) will continue to be lacking as the perception of the business environment suffers from high operating costs and recurrent social initiatives. Only the renewable energy sector is expected to do well. There needs to be more investment in job creation. The contribution of foreign trade is expected to turn slightly negative. While demand and prices of exported minerals (38% of exports) could weaken, domestic demand growth (even if moderate) and higher energy prices will drive imports. Moreover, automotive exports (10% of the total) will likely need more components, while tourism (7% of GDP in 2019) will see a slow recovery. The pace of growth could deviate from our forecast depending on developments in the health situation (about one-quarter of the population was fully vaccinated by the end of 2021), ore and energy prices, the frequency of power cuts, and the social situation.

Modest and conditional fiscal consolidation

The public deficit could again be reduced in the 2022/23 fiscal year. In addition to the continued positive revenue impacts from the substantial profits generated by mining companies and consumption (27% of GDP), the budget could be less burdened by the pandemic and wages (37% of expenditure), provided the authorities manage to ensure that moderation prevails. Yet this will not stabilize the debt burden, whose interest accounts for an estimated 15% of expenditure and 4.8% of GDP. Although the debt is primarily domestic and in rand (89%) and has a long maturity, its amortization and the deficit will account for an estimated 13.3% of GDP in 2021/22. Moreover, non-residents holding 30% of the domestic share imply sensitivity to international capital movements. Consolidation will depend on ore prices, wage pressures, the health situation, and possible new capital injections into weak state-owned enterprises, including Eskom, whose complex restructuring process continues and who would like the state to take over half of its USD 26 billion debt.

The exceptional current account surplus of the last two years is poised to diminish in line with the goods surplus. While exports (27% of GDP) will be less buoyant, imports will be driven by domestic demand and oil prices, which are likely to be moderately higher. The reduction in the services deficit with the recovery of tourism will not compensate for these developments, especially since the transfer and income deficits will persist owing to payment of customs duties to other SACU members, remittances by foreign workers, and income repatriation by foreign investors. FDI remains limited, but foreign exchange reserves are comfortable (equivalent to about five months of imports), significantly since they were boosted in August 2021 by the allocation of special drawing rights by the IMF (9% of pre-existing reserves). External debt, 62% of which is owed by the public sector, represented 53% of GDP at the end of June 2021.

Widespread social and economic challenges 

In the November 2021 municipal elections, the ANC, which has been in power since the end of apartheid, took 46% of the votes amid low turnout. The ANC’s share thus fell below 50% for the first time, reflecting widespread social discontent. The crisis has exacerbated unemployment, poverty, division, and corruption, culminating in July 2021 in riots and looting in KwaZulu-Natal and Gauteng. The traditional opposition parties (DA, EFF) were not the beneficiaries, but independents and regionally-based parties were. While the ANC still has 230 of the 400 seats in the assembly from the 2019 elections, it is more divided than ever. Some prominent members, including former president Jacob Zuma, have been accused of corruption. Its left-wing faction wants land redistribution with limited compensation and increased Black Economic Empowerment (BEE), opposes wage moderation in the civil service, and is holding back the electricity market reform. So far, the judiciary has stuck to a conservative interpretation of BEE, while expropriation would require an unlikely constitutional reform. President Cyril Ramaphosa’s term as ANC leader will end in December 2022, when the party is expected to hold a national conference to elect a new leader. Externally, South Africa provides troops to support SACU military engagement in Mozambique.