Finance Minister Enoch Godongwana has warned that South Africa’s economic recovery is facing headwinds because of global events and domestic problems.
He made these comments during a speech at the 2022 Government Employees Pension Fund (GEPF) thought leadership conference in Cape Town.
Godongwana said that the day after his inaugural budget speech, the Russia-Ukraine conflict escalated.
“The consequence of this escalation, including the sanctions imposed on Russia, gravely impacted our assumptions on the domestic outlook,” he said.
The conflict has created risks to South Africa’s economic outlook and fiscal and monetary policy.
It has exacerbated supply chain bottlenecks and has raised inflationary pressures through higher energy and food prices.
These factors caused a rapid tightening of monetary policy while adding to fiscal pressures.
“Between February and June, the petrol price nearly doubled, putting immense pressure on the already stretched incomes of South Africans,” he said.
Inflation has jumped to a 13-year high, and headline consumer inflation rose significantly in July 2022 to 7.8%. It compares to an average of 6.2% in the first half of 2022.
Furthermore, inflation and rising interest rates have hurt disposable income and disrupted efforts to lower poverty.
It has also negatively impacted consumer spending, economic growth, employment creation, and food security.
Godongwana said these developments’ impact could already be seen in South Africa’s latest GDP numbers.
“Following a more positive real GDP outcome in the first quarter of 2022, second quarter growth shrunk by 0.7%. Notably, household spending also slowed,” he said.
Over the last seven months, the rand has also taken a hammering – sliding from R14 to R18 to the U.S dollar.
The weaker local currency negatively impacted the cost of South Africa’s debt and the price people paid for imports.
Godongwana said in early September that South Africa’s external account turned negative for the first time in a long while.
High commodity prices have helped the local economy, but in recent weeks, they have begun to fall, except for coal.
Coal is one of South Africa’s biggest exports, but many domestic constraints prevent the country from taking full advantage of higher coal prices.
The constraints include the poor state of the freight-rail network and the inefficiency and lack of capacity at South Africa’s ports.
Godongwana warned that the downside risks to the South African economy are intensifying.
The biggest factors impacting the economy include the floods in KwaZulu-Natal, increased load-shedding, rising inflation, and escalating global pressures.
In response to these challenges, the International Monetary Fund (IMF) revised its GDP growth forecast for South Africa downwards to 2.1% in 2022.
The IMF cautioned that tighter global financial conditions could induce debt distress in emerging markets and developing economies.
Major central banks’ aggressive interest rate hikes have already prompted capital outflows from emerging markets like South Africa.
It also sparked fears of economic contraction in the near term.
“Slower growth in China’s economy and a slowdown in global growth means lower external demand, threatening the pace of economic recovery in South Africa,” he said.