South Africa Economic Outlook

Economic performance and outlook

Since 2012, following the sharp decline in international commodity prices for the country’s four key exports—coal, platinum, iron ore and gold—economic growth slowed, compounded by domestic structural weaknesses and subdued investor confidence. After reaching 3.3% in 2011, growth fell to 0.3% in 2016. Growth in output from the country’s key sectors, including manufacturing, dropped from 3% in 2011 to 0.7% in 2016; the contraction in output from mining increased from 0.7% to 4.7% over the same period. Medium-term growth prospects remain subdued; economic growth is was estimated at 0.9% in 2017 and was projected to reach 1.1% in 2018 and 1.6% in 2019.

Macroeconomic evolution

The consolidated budget deficit deteriorated to an estimated 4.3% in 2017 from 3.3% in 2016 as a result of revenue shortfalls. Total public debt is increased to an estimated 54.2% of GDP in 2017 from 50.7% in 2016 but remains sustainable. The Central Bank, through adjustments of the repo rate, kept inflation within the monetary policy target range of 3%–6% in 2017. Inflation declined to 5.1% in September 2017 from a peak of 6.8% in December 2016, due to lower food prices. The rand appreciated nearly 20% between January 2016 and July 2017, primarily as a result of higher export prices. The current account deficit improved to an estimated 2.6% in 2017 from 3.3% in 2016, reflecting lower imports. The current account deficit was financed mainly by non–foreign direct investment flows.

Tailwinds

South Africa struggles with the challenges of a dual economy: high poverty, unemployment, income inequality, and spatial socioeconomic disparities. This struggle is exacerbated by prolonged deindustrialization. Industry accounted for 19% of GDP in 2016, of which 12% is manufacturing, compared with 73% for services. According to the Industrial Policy Action Plan 2017–20, several sectors, including agro-processing clothing, textile, leather, and footwear, show potential for reindustrialization. Some key structural constraints to growth have been addressed. The electricity crisis was reversed in 2016 as additional electricity generation plants came online, adding more than 6,000 MW to the national grid. The government’s top priority in the medium term is infrastructure for transport (which accounts for 34.6% of total infrastructure investment) and water (which accounts for 13% of total infrastructure investment). The prices of major commodity exports increased from 2015 to 2016.

Headwinds

The perception of corruption in public services remains high. The overall business environment is well developed; it is ranked 82 out of 190 countries in the World Bank’s 2018 Doing Business report, but major challenges remain, notably in energy supply, trading across borders, and red tape. Inadequate quality of basic education remains a critical constraint to generating a skilled labor force. Lack of skills is the main cause of high unemployment, 27% in 2017 and more than 50% among young people ages 15–25. Standard and Poor’s downgraded South Africa’s long-term local currency credit ratings to a sub-investment grade in November 2017. It also downgraded the long-term foreign currency sovereign credit rating two steps below a sub-investment grade. The agency affirmed the positive outlook for both local and foreign currency credit ratings. This led to a temporary depreciation of the rand against the U.S. dollar by 2%, but the local currency has since regained value. As Moody’s maintains South Africa’s sovereign credit rating at investment grade, South Africa will not be removed from the World Government Bond Index, making higher capital outflows unlikely.

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