Amid intensifying headwinds, load shedding remains the major drag on South Africa’s economy
• South African growth: In 2022, South Africa’s economy slowed markedly from 2021’s robust recovery. This took place alongside a broader moderation in growth globally and an overall decline in commodity prices, which had played an important role in the country’s growth in 2021. Most notably though, South Africa’s load shedding intensified in both frequency and intensity, therefore possibly acting as the biggest drag on growth in 2022. In 2023, a number of headwinds will see South Africa’s economic growth declining further. While South Africa’s economic woes have their origins from both domestic and global headwinds, the increased intensity of load shedding over the past months has placed the electricity crisis at the forefront of the factors dragging South Africa’s economy.
• Households and the rising cost of living: Household consumption expenditure (together with investment) remained relatively resilient in 2022. Nonetheless, the rapid rise in the cost of living for South Africans is expected to have a further detrimental impact on domestic demand in 2023. Overall consumer inflation reached its highest level in 13 years during 2022. In addition, the current overall subdued economic environment is responsible for the moderation in demand by households as incomes and the general wealth of consumers have been impacted. The consumer confidence index declined significantly during the first quarter of 2023, which suggests muted consumer demand and a decline in household expenditure during the period.
• Unemployment: Although remaining at stubbornly high levels, South Africa’s official unemployment rate declined further in the fourth quarter, and this came on the back of 169,000 more jobs gained during the period. Employment increased for four consecutive quarters during 2022 as it continued to recover from the Covid-19 era losses.
• Manufacturing and mining: Even though load shedding is having an adverse impact on the economy as a whole, both mining and manufacturing are especially impacted as they are highly electricity intensive. At the same time, commodity prices, which had buoyed the mining sector, have seen moderation.
• Investment: Overall investment in 2022 was robust despite the ongoing energy crisis weighing on confidence. Nevertheless, the actual amount of total gross fixed capital formation in 2022 remained significantly lower compared to the 2019 level. The latest, and fifth of President Ramaphosa’s investment conferences was held in April. And judging from investment pledges made, it would indeed appear that the private sector continues to pursue opportunities to invest in the South African economy despite the country’s energy woes.
• Interest rates: The South African Reserve Bank once again raised the benchmark interest rate in March 2023, this time by 50 basis points, which was somewhat unexpected. This is because it came after the Bank had slowed its rate of increase to 25 bps in January of the current year following three consecutive 75 bps increases starting from July 2022. As the current inflation has proven to be rather sticky and risks to inflation outlook remain on the upside, the weaker exchange rate and the continued policy normalization by major central banks are likely to dissuade the SA Reserve Bank from halting interest rate hikes despite the South Africa’s slowing growth.
• The fiscus: Tax revenue collection for FY2022/23 was approximately 7.9% higher than that collected during FY2021/22. The higher revenue was attributed to, amongst other factors, more efficient and effective tax administration as highlighted by the Minister during the 2023 Budget Speech. Similarly, the South African government’s net borrowing requirements declined significantly once again—the preliminary borrowing requirement of the non-financial public sector in the first nine months of FY2022/23 was approximately half of the borrowing requirement in the same period of the previous fiscal year. However, the Treasury has decided for the government to assume responsibility for 67% of Eskom's extensive debt, with the debt-relief arrangement expected to have a significant impact on the government's debt stock.
• Current account: South Africa’s current account balance went from a surplus of R228 billion in 2021, which was also the largest annual surplus on record, to a deficit of R31.8 billion in 2022. The Reserve Bank in March forecast South Africa’s commodity export index (which still remains above long-run average in historic terms) to decline by 20% in 2023 following an increase of 1.4% in 2021. This will have a further negative impact on the country’s terms of trade and trade balance.
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