Power outages, commodity prices erode South Africa's growth

Experts warn South Africa’s growth is too low to create enough jobs to absorb new workers entering the labor market.
The country’s fiscal position is projected to deteriorate due to weakening mineral revenue. Utility Eskom’s debt bailout, wage bill, and rising debt pile more pressure.
As a result, public debt is not expected to stabilise. And headline inflation will return to the midpoint of the target range by end 2024.

South Africa’s real GDP growth is projected at 0.1 percent in 2023, reflecting a significant increase in the intensity of power outages, and weaker commodity prices and external environment.

According to the International Monetary Fund (IMF), annual growth is expected at about 1.5 per cent over the medium term. The country is under vice-like grip of long-standing structural impediments.

South Africa’s power outage woes

For instance, South Africa is struggling with product and labor market rigidities. It is also facing human capital constraints amid biting energy supply woes. Incessant power outages are forcing companies to invest more on energy-related infrastructure.

Already, economic experts are warning that the country’s growth level will be too low to create enough jobs. This caution comes at a time when significant number of fresh talent is entering the labor market. The fiscal position is projected to deteriorate due to weakening mineral revenue. Further, Eskom debt relief arrangement, wage bill, and rising debt service is piling more pressure.

As a result, public debt is not expected to stabilise. The country’s headline inflation will swing back to the midpoint of the target range by end 2024. Projections show that the current account deficit will deteriorate to about 2.5 per cent of GDP in the near term.

The outlook is subject to significant uncertainty related to the pace of reform domestically and the challenging external environment.

Higher food and energy prices

On May 22, the Executive Board of the IMF concluded the Article IV consultation with South Africa. South Africa’s economy is grappling with a myriad of economic and social challenges. Growth moderated from 4.9 per cent in 2021 to 2.0 percent in 2022. This was attributable to effects of Russia-Ukraine war, and global monetary policy tightening. Domestically, severe floods partly due to climate change and unprecedented energy crisis hit the economy hard.

Across the economy, business, consumer confidence and investor sentiment remain weak. Additionally the sovereign spread for South Africa remains higher than the pre-pandemic level, IMF noted.

The average employment level in 2022 was still about five per cent lower than in 2019, threatening social cohesion. Headline inflation has crossed South African Reserve Bank’s 3–6 per cent target range amid higher food and energy prices. Inflation expectations have inched up but remained within the target range.

In 2022, the current account balance decreased to a -0.5 per cent GDP deficit from a 3.7 per cent GDP surplus in 2021. The steady drop was due to lower commodity prices and logistical bottlenecks.

As a consequence, the local currency is getting a huge beating. Tighter global financial conditions, and shifts in investors sentiment have seen the rand lose to major currencies. The Rand is also weakening on account of increased domestic political uncertainty.

Keep inflation within target range

The fiscal deficit has continued to narrow, reaching 4.2 per cent of GDP in FY2022/23. This was a drop from 4.8 percent in FY2021/22, thanks to buoyant revenue and expenditure restraint.

Despite this improvement, the government debt-to-GDP ratio is estimated to have increased to 70 percent. The SARB has proactively raised interest rates to bring down inflation. The regulator projects to keep inflation within the target range.

While recognising South Africa’s strong fundamentals, IMF Directors noted that the post-pandemic recovery is petering out amid several shocks, exacerbating economic and social challenges in a context of elevated poverty and inequality.

They stressed the urgency of reforms to promote the sustained and inclusive growth needed to address these challenges.

Directors commended the South African Reserve Bank’s commitment to price stability and endorsed the pace of monetary policy normalisation, which should bring inflation back within the target. They have recommended maintaining a data-dependent approach to monetary policy decisions.

“Directors supported enhancing the inflation targeting framework by formalising the current focus on the midpoint of the target range and lowering the inflation target, as conditions allow and with adequate communication,” IMF said on June 6th.

Resilience of the financial sector

The recent reduction in the fiscal deficit has, however, been lauded, reflecting efforts to contain public spending and improve revenue administration. IMF is encouraging stronger fiscal consolidation under a credible medium-term framework. The lender says the goal is to put public debt on a firmly declining path, while protecting productive investment and well-targeted social spending.

“This should be supported by reforms to the fiscal framework, procurement system, and public investment management,” IMF noted.

Directors have welcomed the resilience of the financial sector in the face of recent global financial market volatility. They called for continued implementation of the Financial Sector Assessment Program recommendations to strengthen the financial safety net and supervision.

“Directors acknowledged that while advancing fiscal consolidation will mitigate risks from the sovereign-financial nexus, carefully calibrated and communicated prudential measures could play a complementary role while being mindful of procyclicality and potential unintended consequences on financial institutions’ balance sheets,” IMF said.

The institution has emphasised that promoting a sustainable, inclusive, and green recovery requires reforms that foster private investment, a balanced energy transition, and good governance.

Reforming education to tackle joblessness

The IMF also recommended further measures to reform State-Owned Enterprises. Other points of action include undertakings to open key network industries to private sector participation. The lender is also recommending a reduction of the regulatory burden, and enhanced labor market flexibility. The range of reforms will also focus on the quality of education to tackle joblessness.

To add on, resolving the ongoing energy crisis that is manifesting in power outages remains a top priority. The challenges is providing an opportunity to accelerate the rollout of renewables.

IMF said it supports steadfast implementation of the government’s energy transition plan. However, it also emphasised on the importance of fiscal support for the affected communities and workers.

The IMF directors further recommended to forcefully tackle governance weaknesses and corruption. They added that timely implementation of the Financial Action Task Force’s action plan is crucial to exit its grey list swiftly.

The latest update on South Africa by the IMF comes after the World Bank projected a sluggish growth across Sub-Saharan Africa. The World Bank cited uncertainty in the global economy, and the underperformance of Africa’s largest economies. High inflation, and a sharp deceleration of investment growth is also eroding growth.

Boost shared prosperity in economies

In the face of dampened growth prospects and rising debt levels, African governments must sharpen their focus on macroeconomic stability. Another key priority will be domestic revenue mobilisation, and debt reduction. Also in the in-trays of policymakers will be plans to catalyse productive investments to reduce extreme poverty. Overall, these strategies will boost shared prosperity in the economies, said the World Bank.

Economic growth in Sub-Saharan Africa will slow from 3.6 per cent in 2022 to 3.1 per cent in 2023. This is the projection in Africa’s Pulse, the World Bank’s April 2023 economic update for the region.

The World Bank is projecting South Africa’s economy to weaken further in 2023 to 0.5 per cent annual growth. The drop is on account of the roiling energy crisis. In West Africa, however, Nigeria is experiencing a recovery and could post 2.8 per cent GDP jump this year. Nigeria’s oil business is, however, still fragile on subdued production volumes.

The real gross domestic product (GDP) growth of the Western and Central Africa sub-region is estimated to decline to 3.4 per cent in 2023 from 3.7 per cent in 2022, while that of Eastern and Southern Africa declines to 3.0 per cent in 2023 from 3.5 per cent in 2022.

“Weak growth combined with debt vulnerabilities and dismal investment growth risks a lost decade in poverty reduction,” said Andrew Dabalen, World Bank Chief Economist for Africa.

“Policy makers need to redouble efforts to curb inflation, boost domestic resource mobilisation, and enact pro-growth reforms—while continuing to help the poorest households cope with the rising costs of living,” Dabalen added.

Debt distress risks remain high with 22 countries in the region at high risk of external debt distress or in debt distress as of December 2022.

Increased borrowing costs in Africa

The World Bank said unfavorable global financial conditions have increased borrowing costs and debt service costs in Africa. The is leading to the diversion of budget from key investments thereby threatening macro-fiscal stability.

Stubbornly high inflation and low investment growth continue to constrain African economies. While headline inflation peaked in the past year, it is set to remain high at 7.5 per cent for 2023. Unfortunately, this is above central bank target bands for most countries, according to the World Bank.

Investment growth in Sub-Saharan Africa fell from 6.8 per cent in 2010-13 to 1.6 per cent in 2021. Statistics show that there was a sharper slowdown in Eastern and Southern Africa than in Western and Central Africa. Despite these challenges, many countries in the region remain resilient.

These include Kenya, Cote d’Ivoire, and DRC, who grew at 5.2 per cent, 6.7 per cent, and 8.6 per cent, respectively last year. DRC’s mining sector was the main driver of growth due to an expansion in capacity and recovery in global demand.