South Africa’s economic potential improves, but emerging headwinds amid new geopolitical dynamics could pose a risk
• Bonds: The South African bond market in 2024 was marked by heightened volatility, reflecting both domestic economic conditions and global financial pressures. As such, the year saw substantial fluctuations in net bond purchases. Yet, the successful formation of the Government of National Unity (GNU) following the elections, together with a stable power supply, contributed to a resurgence in confidence. This can be seen in the markedly larger net purchase of South African bonds by non-residents during H2-2024 versus H1-2024. In addition, average annual inflation has been significantly lower from the second half of the year. However, despite the largely positive turn in fortunes for the South African bond market during H2-2024, the recent change in administration in the US and the resultant increased uncertainty, especially regarding trade policy, have already led to a marked shift in market sentiments.
• SA credit rating: South Africa’s economic outlook garnered cautiously optimistic assessments from both S&P and Moody’s during the fourth quarter of 2024. Still, while both agencies acknowledge improvements in South Africa’s economic and fiscal environment, they emphasize that sustained progress will depend on further structural reforms to address long-standing vulnerabilities.
• South African growth: South Africa’s economic growth surprised on the downside, and contracted during the third quarter of 2024. The decline in GDP came mainly on the back of a deep contraction in the agriculture sector—a notoriously volatile sector. Consequently, the real gross value added (GVA) by the non-agricultural sector grew by 0.5% in the third quarter of 2024. Still, despite a marked improvement in electricity supply, South Africa’s economy remains under pressure. Logistical issues, particularly related to ports and rail inefficiencies, continue to be a major drag on economic growth. However, lower inflation will alleviate cost pressures for businesses, fostering a more favorable environment for investment and growth. We expect South Africa’s economic growth to have registered a growth rate of approximately 0.7% in 2024 and for growth to improve to 1.6% in 2025.
• Electricity: The “electricity, gas and water” sector underwent another expansion in Q3-2024. Despite the sector’s “negligible” contribution towards overall GDP growth because of its size, the sector plays a vital role in the functioning of the other sectors and the rest of the economy, and we expect the sector’s ongoing revival to contribute meaningfully towards other sectors’ performance going forward.
• Business confidence: Despite still being slightly below 50 index points, the business confidence index experienced a third consecutive increase during Q4-2024, with factors such as the continued supply of more reliable electricity and interest rate cuts by the Reserve Bank likely responsible for the improved optimism. The boost in confidence is anticipated to have a positive impact on both production and investment.
• Employment: The number of individuals employed increased by 294,000 in Q3-2024, and the official unemployment rate declined by 1.4 percentage points from the second quarter of 2024 to the third quarter.
• Inflation: Current inflation trends point to overall inflation that is largely under control, which chiefly came on the back of lower fuel prices, a more normalized global supply chain, and the South African Reserve Bank’s roughly three-year fight against inflation. December 2024 marked the fifth consecutive month during which the annual inflation was below the Reserve Bank’s preferred rate of 4.5%. Notwithstanding the relatively low annual inflation prints, risks to inflation remain, with some new ones having emerged.
• Interest rates: At its first meeting for 2025, the South African Reserve Bank's Monetary Policy Committee (MPC) decided to once again cut the benchmark interest rate by 25 basis points, which marked the third consecutive meeting at which they did so. Given the Reserve Bank's primary mandate of ensuring price stability, the January 2025 decision aligns well with the prevailing inflationary trends in the country. Due to the remaining risks to inflation, we expect a more cautious approach towards monetary policy adjustments in the near term.
• The fiscus: The 2025 Budget is to be presented on February 19, and it is expected to indicate a further deterioration in the South African fiscus. Government revenue growth remains subdued, reflecting sluggish economic activity. The expected revenue shortfall, particularly in the face of elevated debt-service costs, poses challenges for fiscal sustainability.
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