South Africa

South Africa’s grim growth prospects

S&P Global recently revised its expectations for GDP growth across emerging markets downward to an average of 4.1% for 2023 from 4.3% in March, and South Africa saw a 0.2% drop in its expected growth.

In March, S&P expected South Africa’s economy to grow by 0.8%. However, the agency now expects the country’s GDP to grow by only 0.6% in 2023.

S&P ascribed this downward revision to South Africa’s ongoing electricity and logistics crises.

It said the country’s growth prospects are “grim” because South Africa faces severe electricity shortages and transportation bottlenecks. 

“The government has introduced measures to encourage private-sector growth and renewable electricity generation, but it will take time for additional power supply to improve electricity availability for the wider economy,” said S&P. 

Uncertainty surrounding the country’s electricity dynamics remains high, which handicaps the agriculture, mining, and manufacturing sectors.

“We assume conditions will improve somewhat from current stagnant growth past the winter in the southern hemisphere as pent-up capacity improvements facilitate higher growth in 2024 and beyond.”

“Still, next year’s economic growth prospects are also limited by weak global demand and higher interest rates to fight inflation.”

S&P expects South Africa’s inflation to remain high and outside the South African Reserve Bank’s target range of 3% to 6% in 2023. It expects inflation in 2023 to average 6.1% and only fall to 5.1% in 2024.

The agency has also priced in another 25 basis point interest rate hike for South Africa this year, as it expects the repo rate to reach 8.50% in 2023 – currently at 8.25%.

South African Reserve Bank Governor Lesetja Kganyago. Source: Ryan Rayburn/IMF Photo

“Weakening investor sentiment has underlined somewhat weakening currency this year despite the South Africa Reserve Bank hiking rates to maintain otherwise favourable interest rate differentials for investors,” the agency said.

Hope for an improved rand is also low, as S&P expects the currency to average R18.1 to the US dollar in 2023, far above what many believe to be the fair value.

“Rand vulnerability is expected to remain elevated, with the currency expected to make up only some of its losses toward year-end.”

Of the 18 emerging markets S&P considers, South Africa was one of only five to see exchange rate depreciation in 2023.

However, S&P expects all the emerging market countries in Europe, the Middle East, Africa, and Latin America to grow well below long-term trends in the next 12 months.

According to the agency, the economic aftershock of the Covid-19 pandemic is still being felt in emerging markets.

“Since the onset of the pandemic, emerging market economies have struggled to rebuild amid the Russia-Ukraine conflict and its impact on global supply chains, alongside increasing food and energy prices, challenging credit conditions and questions about the vulnerability of their banks and companies to financial stress,” it said.

“External conditions will be tough. We see [emerging markets] gradually returning to their potential growth rates later in 2024 and 2025 as inflationary pressures recede and central banks begin to ease.”


Top JSE indices