South Africa’s changing political landscape amid growth challenges
• South Africa’s growth: During H1-2024, the South African economy not only continued to languish under the strain of the usual domestic headwinds—inadequate electricity supply and logistical constraints—but it also suffered under heightened uncertainty due to the then-upcoming general elections. However, there is optimism that the tide has turned on account of accelerating reforms in the major network industries.
• SA Bonds: Volatility remains in South Africa’s bond market. However, in the first six months of 2024, non-residents made cumulative net purchases of SA bonds, reversing the cumulative net sales recorded during the same period in 2023. Pressure from SA government’s elevated borrowing requirement, especially amid the current insipid growth environment, will continue to exert upward pressure on yields.
• SA external debt: The country’s total external debt increased in the final quarter of 2023. This was on the back of the rise in the rand-denominated external debt (in US dollars terms) largely driven by the net purchase of bonds by non-residents and the rise in the bonds’ market value, as well as changes in the exchange rate. On the other hand, there was a slight decrease in the foreign currency denominated external debt. Contrary to the quarterly movement, South Africa’s total external debt declined from 2022 to 2023. The recent strengthening of the rand should have a positive impact on South Africa’s foreign currency denominated debt. In addition, despite the substantial rise in the country’s government debt over the past years, South Africa’s government foreign currency debt still makes up only 11.3% of total government debt.
• Mining: Logistical constraints continue to significantly disrupt mining activity, exacerbating the negative impact of load-shedding. The declining volume of goods transported by rail, coupled with falling port productivity, has severely affected economic activity, particularly that of bulk commodity producers. On the other hand, despite the decline from 2022 to 2023 in South Africa’s attractiveness score for mining investment, the country’s “policy perception” sub-index registered an improvement.
• Manufacturing: Manufacturing production rebounded during the second quarter of 2024 following a contraction in the first quarter. According to a Q2-2024 manufacturing survey, confidence among local manufacturers has reached its highest level in two years.
• Households: Household real final consumption expenditure declined in Q1-2024 following a slight increase in Q4-2023. Similarly, household consumption expenditure in Q1-2024 was 0.4% lower than in Q1-2023. The persistent high cost of living will continue to have a detrimental impact on households’ purchasing power. The increased unemployment rate in the second quarter of 2024 does not help matters. Nonetheless, there was a notable improvement in consumer confidence in Q2-2024, suggesting a gradual recovery in consumer spending compared to the weak performance seen over the past year. Moderating inflation is one of the key factors in improving consumer sentiment.
• Inflation and interest rates: With South Africa’s interest rates remaining at levels deemed restrictive by the country’s monetary authority, South Africa’s inflation has continued on its downward trend. Nonetheless, inflation has consistently stayed within the 5% to 6% range over the past 10 months due to its relative stickiness. The SA Reserve Bank forecasts inflation to return to the inflation target mid-point of 4.5% in the next few quarters, especially on the back of moderating food and fuel inflation.
• Exchange rate: The domestic currency has benefited from South Africa’s smooth transition into a government of national unity (GNU) and from no load-shedding since March 2024. The currency was also boosted by recent positive commodity price movements. Locally, the working of the GNU will have a material impact on the rand’s exchange rate trends.
• SA political landscape: Weeks after the May 29th elections, President Ramaphosa announced the formation of his second cabinet, marking a significant shift in South Africa’s political landscape. Unable to secure enough votes to govern alone, the ANC formed a grand coalition with 11 of the 18 parties in Parliament, including the DA and IFP under the title of GNU. The success of the GNU will depend on its ability to revive the economy, create jobs, accelerate public service delivery, and stabilize public finances, which will be critical in determining the future political landscape of the country.
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