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South Africa Economic Outlook
Recent macroeconomic and financial developments
South Africa’s real GDP growth was 0.2% in 2019. The pandemic and the containment measures to curb the spread of the virus further damaged the economy. Real GDP contracted by 8.2% in 2020, the result of a decline in construction, transport and communication, manufacturing, and mining. On the demand side, all components declined, with the largest contraction, 32.4%, recorded in investment. The Reserve Bank of South Africa cut the policy rate by a cumulative 300 basis points in 2020, from 6.5% to 3.5%, to support businesses and households affected by the pandemic. Inflation was estimated to decline to 3.4% in 2020, within the reserve bank target of 3%–6%. The budget deficit was estimated to widen significantly to more than 14% of GDP, mainly due to spending pressures to contain the economic impact of the pandemic. The country will, however, record its first current account surplus in 2020, estimated at about 1% of GDP, because of the high price of the gold it exports, a low bill for fuel imports, and increased agricultural exports. Despite the pandemic, the South African banking sector remains sound, with a capital ratio of 16.3%, which is above the 10% regulatory requirement. Domestic credit to private sector reached $280 billion in November 2020, an increase of 3.5% from December 2019, when it was 139% of GDP. Lingering economic weaknesses prompted the three major credit rating agencies to downgrade South Africa’s local and foreign currency credit rating to subinvestment grade. Nevertheless, real private investment expanded by 33.2% in the third quarter of 2020. Social indicators are likely to remain weak due to the severity of the pandemic and legacy issues of low human development. About 2.6 million people have lost their jobs since March 2020, bringing the unemployment rate to 30.8% in September 2020 from 23.3% in December 2019.
Outlook and risks
Real GDP growth is projected to rebound to 3.0% in 2021, but the pace of the recovery will slow to 1.6% in 2022 due to continued structural constraints such as unreliable electricity supply and job regulations. The inflation rate is projected at 4.2% in 2021 and is expected to stay within the reserve banks’ target range of 3%–6% for 2022. The current account surplus is expected to erode, since a recovery in oil prices could raise the import bill. Public debt could reach more than 90% of GDP in the medium term, with projections that it will stabilize at 95% in 2026. The 2020 Medium Term Budget Policy Statement (MTBPS) in October 2020 projected a significantly larger budget deficit and slower debt consolidation in the medium term. These projections will raise risks due to the high debt-service costs and deteriorating balance sheets of state-owned enterprises and the continued weaknesses of the financial position of municipalities.
Financing issues and options
The 2020 MTBPS proposed steps to reduce the public service wage bill and investment driven by state-owned companies in order to narrow the fiscal deficit and stabilize the debt-to-GDP ratio over a five-year period. The treasury expects to reduce the wage bill—the major driver of the fiscal deficit—by nearly $1.8 billion through 2023–24. The proposal has already raised the risk of widespread strikes by the 1.3 million public sector workers. Also, calls for debt guaranteed by the government to support higher levels of capital investment will be discouraged. This could push South African Airways into liquidation and the electric utility Eskom to adopt tariffs that reflects its costs, which would be efficient but unpopular. In 2020, the South Africa government committed itself to investment in public utilities through strong private sector participation. South Africa’s gross international reserves increased slightly from $52.4 billion at the end of March 2020, covering 6.9 months of imports, to $53.8 billion at the end of November 2020, covering 8.3 months of imports. This progress mainly reflects foreign borrowings received on behalf of the government from multilateral banks, including the African Development Bank, to cope with the pandemic crisis.
