While South Africa’s Covid-19 ‘state of disaster’ may formally be over, the country’s economic woes remain entrenched. After a brief post-Covid bounce in 2021 – with the government in April of this year lifting disaster measures put in place to tackle the coronavirus – the continent’s most industrialised economy is bearing the brunt of the twin global challenges of lower economic growth and soaring inflation.
Such challenges are exacerbated by a series of domestic economic crises that have restricted growth even ahead of the pandemic; longer-term handicaps, such as government corruption – which hit new highs under former president Jacob Zuma – and underinvestment in the country’s electricity network and other infrastructure, have not been helped by recent flooding in the country’s KwaZulu-Natal province.
The government of Cyril Ramaphosa has, in recent months, introduced new legislation to address some of the South Africa’s most pressing challenges, seeking to overhaul the country’s power generation capacity and address deficiencies in financial regulation. Yet the population’s confidence in both Mr Ramaphosa and the ruling ANC party, which faces greater electoral challenges in the coming years than at any time in the post-apartheid era, is waning.
Battling inflation
In common with its African and international peers, South Africa faces significant inflationary pressures due to the impact of Russia’s invasion of Ukraine, with prices set to remain elevated into 2024. Higher fuel and food prices saw inflation hit a 13-year high of 7.8% in July, dropping slightly to 7.6% in August.
Following the resumption of monetary tightening last November, the South African Reserve Bank (SARB) has accelerated interest rate rises in the second half of the year, with two consecutive 75 basis point rises – the largest in nearly 20 years – in July and September. Further increases are expected at SARB’s monetary committee’s next meeting in November.
“We don’t see this latest move as the last in the SARB’s tightening cycle, given that headline inflation is uncomfortably high and there’s a backdrop of aggressive tightening by the Fed and other central banks,” says Virág Fórizs, emerging markets economist at Capital Economics.
“The central bank has clearly signalled that it’s going to do everything it can to bring inflation down to the 4.5% midpoint of its target range, so we expect further rate hikes in the months to come.”
we expect further rate hikes in the months to come
In a statement delivered after the September rate rise, SARB governor Lesetja Kganyago said that inflation was expected to remain above 6% until the second quarter of next year, before reverting to the midpoint of its target range by the fourth quarter of 2024.
Inflationary pressures are set to compound the weaknesses of the country’s economy, which have been building gradually over past decades. After peaking in 2006, growth has slowed considerably (see chart), due to a weak private sector investment and rising unemployment, which stood at 33.9% of the population at end-March 2022.
Gross domestic product (GDP) growth stood at a mere 0.1% in 2019, with only Japan and Mexico registering weaker growth among the G20. The country’s stringent lockdowns, coupled with a collapse in commodity prices and tourist visitors, saw the economy shrink by 6.4% in 2020, the sharpest contraction of the post-apartheid era.
After posting a bounce of 5% in 2021, growth has subsequently stagnated; GDP contracted by 0.7% in the three months to end-June 2022 due to severe flooding in the country’s KwaZulu-Natal region, home to South Africa’s second-largest city Durban. The SARB, in late September, forecast growth of just 1.9% in 2022 and 1.4% in 2023, rising to 1.7% in 2024.
Deficit and debt
The country’s already sluggish economic growth prospects are further constrained by the government’s attempts to rein in spending in a bid to contain a fiscal deficit and public debt that has only been exacerbated by Covid support measures.
The fiscal deficit rose to 9.7% of GDP in 2020 before declining to 8.4% in 2021, with the public debt standing at around 70% of GDP at end-June 2022. And while the deficit subsequently recovered to 5.2% for the financial year ending March 2022, thanks to higher-than-expected profits in the mining sector, South Africa’s mounting economic pressures make consolidation an increasingly difficult task.
“It’s going to be a challenge for the government to be able to deliver the fiscal consolidation required as pressure to continue pandemic-related support measures of the past two years mounts and the current cost of living crisis prompted by the war in the Ukraine bites,” says Ms Fórizs.
Grid fails to power growth
One of the most pressing constraints on economic growth is the country’s ailing electricity grid, dominated by state-owned Eskom. Underinvestment and a lack of modernisation at its coal plants has seen the utility fail to increase electricity capacity sufficiently to meet demand, forcing it to deploy a rolling series of outages to prevent the collapse of the entire grid.
Such outages have increased steadily over the past three years, with power cuts – often lasting up to 12 hours – recorded on 100 days of the year by the middle of September.
“By far the most material [constraint on growth] is the lack of a reliable, effective, and efficient electricity supply,” says Mike Brown, CEO of the country’s fourth-largest lender, Nedbank.
“The economy isn’t going to be able to grow by more than 2%–2.5% until we are able to connect another 10–12 megawatts of capacity to the grid.”
The government has unveiled a plan to tackle the energy crisis, which will prioritise the upgrade of existing Eskom power plants and accelerate the procurement of new capacity, while encouraging the adoption of solar and other renewable energy technologies.
Significantly, the plan includes provisions to encourage the private sector to contribute to the grid itself, paving the way for the mining sector and other businesses to install their own energy-generating capacity.
“Many of the key parts of the president’s plan, including boosting renewable energy capacity and allowing independent power production, are steps in the right direction, but will take a number of years to be implemented,” says Ms Fórizs.
State capture and corruption
While Eskom’s operations have been hampered in recent years by unauthorised strikes and sabotage by criminal syndicates, the utility is widely seen as having suffered from mismanagement and corrupt practices as one of the primary targets of the so-called ‘state capture’ programme alleged to have been undertaken by the Gupta family in collaboration with former president Jacob Zuma.
The Zondo Commission, set up in 2016 to examine the allegations of widespread corruption, reported in April that the Guptas, with Mr Zuma’s support, schemed to place pliable individuals in key positions of management to advance their personal business agendas. Mr Zuma and the Guptas deny any wrongdoing.
The government of Mr Ramaphosa, elected on an anti-corruption ticket in 2018 following the resignation of Mr Zuma, has in recent months moved to clean up financial regulation in the country in the wake of a damning report by the Financial Action Task Force (FATF) in October 2021.
The report noted that state capture in enforcement agencies resulted in a systematic evasion of the country’s money laundering and terrorism financing controls, leading to threats of inclusion on the FATF grey list if it failed to remedy the situation. In response, the cabinet approved the tabling of the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill in parliament.
Yet, while Mr Ramaphosa emphasised his commitment to the improvement of the economy and tackling of corruption at the ANC’s national policy conference in July, disillusionment with both him and the party is increasing. The president faces an independent inquiry over claims that he covered up a burglary at one of his properties where large sums of money were found concealed in items of furniture. Mr Ramaphosa has denied all claims of wrongdoing.
Meanwhile, the ANC, which has triumphed in every electoral campaign since the end of the apartheid era in 1994, is rapidly losing support over perceived governance failures and a failure to contain corruption. In local elections last year, the party’s share of the vote fell below 50% for the first time, with political observers predicting the party may be forced into a coalition government in the general elections of 2024.
