Loadshedding and logistical bottlenecks continue undermining South Africa’s economy
• South Africa’s growth: As numerous negative shocks and other headwinds continue to adversely impact the South African economy, we expect growth to remain insipid for the rest of 2023. Intense load-shedding and the country’s continuing below standard rail and port infrastructure are deeply undermining South Africa’s growth.
• SA Bonds: Muted domestic growth alongside increased risk aversion related to still elevated global inflation and tighter monetary policy led to the net sale of South African bonds by foreign nationals during three out of the first six months of 2023. At the same time, bond yields remain elevated. Growth in the supply of bonds for the funding of the increased borrowing requirement by the government, especially on the back of lackluster economic growth, will continue to exert upward pressure on yields.
• Foreign debt and the SA exchange rate: Despite foreign currency debt's making up only 11.4% of total South African government gross debt, it has grown substantially over the past years. As such, the risk posed by the depreciation of the rand against the US dollar on South Africa’s debt, including debt servicing costs, has become amplified.
• Mining: As activity in the South African economy continues to be undermined by infrastructural bottlenecks, the mining sector has been particularly impacted. Nonetheless, gold production has experienced a boost due to increased prices driven by increased demand for gold as a safe-haven asset. On the other hand, the price of coal declined markedly following a period of high prices. The ongoing investment in electricity infrastructure, including by the mining sector for self-generation purposes, should have a positive impact on the sector going forward.
• Households: While remaining somewhat resilient, consumption expenditure by households moderated during Q1-2023 as the still elevated inflation rate and high cost of living are having a detrimental impact on consumer purchasing power. South Africa’s unemployment rate increased by 0.2 of a percentage point during Q1-2023 after declining for four consecutive quarters, while the consumer confidence index declined during Q2-2023. These dynamics will continue to have a negative impact on household consumption expenditure, which accounts for over 60% of nominal GDP.
• Investment: Investment, too, remained resilient in Q1-2023. However, the level of real gross fixed capital expenditure remained significantly below the average level recorded in 2019. Nonetheless, the level of real gross fixed investment in the first quarter of 2023 was higher than in the same period of 2022. This indicates a positive trend in fixed investment over the year, although still lagging pre-pandemic levels.
• Inflation: South Africa’s inflation has been moderating following aggressive monetary policy normalization. The latest inflation figures show that consumer prices registered a marked deceleration from May to June 2023, with this also resulting in annual inflation's dropping below the upper limit of the SA Reserve Bank’s (SARB) monetary policy target range of 3-6%—inflation had not been below 6% since April 2022.
• Interest rates: The Reserve Bank’s Monetary Policy Committee unexpectedly voted to keep the benchmark interest rate unchanged during its fourth meeting of the year in July after two interest rate increases of 50 basis points each. With the Reserve Bank’s inflation outlook remaining on the upside and two members of the MPC having voted for an increase of 25 bps (vs. the three who voted for no increase), it is unlikely that the Bank will cut rates during the MPC’s remaining two meetings of 2023.
• The South African exchange rate: The rand has been strengthening following weeks of significant weakness. Following the announcement by both President Putin and President Ramaphosa that the Russian President would not be attending the 2023 Summit in South Africa on August 22-24, and the risk of South Africa's being excluded from AGOA mitigated for now, the jittery markets somewhat calmed down. Recently, the rand strengthened further against the US dollar despite the US Fed's raising interest rates by 25 bps, with the comment by chairman Jerome Powell that the Fed did not expect the US to go into an economic downturn having boosted confidence and investor sentiment. Yet, South Africa’s structural issues continue to weigh on GDP growth, and the country’s exchange rate remains volatile and sensitive to shocks.
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