2021q2

Regional eXplorer (ReX) update – 2nd quarter of 2021

IHS Markit is glad to announce the second quarter update for 2021 of Regional eXplorer (ReX) – the South African knowledge base of municipal level insight. Each quarter, data from a vast number of sources are incorporated into the ReX database to provide users with the most up-to-date statistics.

In this newsletter:

First-quarter 2021 GDP growth exceeds expectations, but recovery remains vulnerable
Near-term Economic Outlook
Renewable electricity program to ease chronic supply problems
Main data releases incorporated in this update

First-quarter 2021 GDP growth exceeds expectations, but recovery remains vulnerable

South Africa’s GDP is expected to rebound by 4.5% in 2021, as first–quarter 2021 GDP exceeds expectations. The economy will benefit from a strong global economic backdrop, low interest rates, and the rollout of the COVID-19 vaccine program in the second half of 2021.
Favorable medium-term inflation expectations are likely to keep the South African Reserve Bank’s policy unchanged during 2021. Headline inflation will average 4.5% in the year, while the rand is expected to average ZAR14.20/USD1.00. South Africa’s monetary policy remains expansionary.
The unfolding COVID-19 pandemic remains the biggest risk to the economic outlook in 2021. Repeated electricity disruptions, reflecting the depletion of infrastructure and finances at state power producer Eskom add to the near-term growth concerns.

Near-term Economic Outlook

A stronger-than-expected acceleration in South Africa’s first–quarter real GDP is projected to leave overall growth for 2021 at 4.6%. The lifting of COVID-19–related summer government restrictions boosted household spending while a buildup in inventories made an 8.0 percentage points contribution to overall GDP. Exports and fixed investment showed less resilience with both categories recording negative quarter on-quarter (q/q) growth during the first quarter of 2021.
Repeated electricity disruptions, reflecting the depletion of infrastructure and finances at state power producer Eskom, combined with the evolving COVID-19 pandemic and a slow rollout of the COVID-19 vaccine program, pose the biggest risks to South African’s near-term recovery. Currently only 1.08 per 100 people have been vaccinated in South Africa. The government’s COVID-19 vaccine program has been delayed by vaccine efficacy issues, production disruptions at the US Johnson & Johnson plant, and global vaccine shortages. COVID-19 cases have been picking up, leaving South Africa amid its third wave and heightened government restrictions by mid-June 2021.
The COVID-19 pandemic had already been detrimental for South Africa’s job market with the unemployment rate ending the first quarter of 2021 at 32.6%, from 30.1% for the same period in 2020. Higher unemployment rates in the informal sector has been the most pronounced. Although pent-up demand and low interest rates will benefit consumer spending, the rebound is likely to be slow. Job losses combined with higher inflation, lackluster growth in household sector credit extension, and only small gains in real disposable income levels will limit the upward momentum in household spending during the year.
The COVID-19 pandemic had already been detrimental for South Africa’s job market with the unemployment rate ending the first quarter of 2021 at 32.6%, from 30.1% for the same period in 2020. Higher unemployment rates in the informal sector has been the most pronounced. Although pent-up demand and low interest rates will benefit consumer spending, the rebound is likely to be slow. Job losses combined with higher inflation, lackluster growth in household sector credit extension, and only small gains in real disposable income levels will limit the upward momentum in household spending during the year.
The gradual recovery of global growth is likely to benefit the South African economy during 2021. Resilient global commodity prices and stronger global trade are likely to prop up exports of goods during 2021. Tourist arrivals to the country could furthermore show stronger gains starting in the fourth quarter of 2021. Less import congestion owing to supply chain disruptions, higher global oil prices, and stronger local demand will increase imports during 2021. A net positive contribution of trade to overall GDP growth is assumed for 2021.

Interest rates likely to remain unchanged during 2021.

The rand exchange rate strengthened by 2.4% against the US dollar in May following a 3.8% appreciation against the greenback in April. The exchange rate benefited from strong South African export–related commodity prices such as platinum, coal, and gold resulting in a positive balance of payments position. Favorable emerging-market investor sentiment which spurred portfolio inflows, added to the rand’s strength. IHS Markit analysts expect that the rand could weaken during the second half of 2021 as the current account swings back to a deficit position while the US dollar strength is assumed over the period.
In the medium term, price differentials with the rest of the world, movements in commodity prices, the current-account deficit, and the level of international reserves will determine the rand’s level. South Africa has a high import propensity of 28.0% of GDP, which with its slow-developing and relatively fragile export markets, should keep external accounts in the red and place downward pressure on the rand. Furthermore, inflation is expected to stay at about 4.5–5.0%, with global inflation about 2.0–2.5%. This leaves the inflation differential at approximately 2.0%, which is the expected rate of depreciation for the South African rand in the longer term. Upside pressures on the rand, which are expected to cushion the currency’s longer-term depreciating bias, include a sustained upswing in foreign investor interest toward emerging markets and upwardly trending commodity prices as global growth gradually improves.
Headline inflation is expected to pick up in 2021. The low base year of comparison and higher global oil prices combined with rising electricity cost will push South Africa’s headline inflation back up to 4.5% in 2021—still well within the South African Reserve Bank’s (SARB’s) official inflation target range. A negative output gap plus vulnerable economic recovery anticipated during 2021 should keep the policy rate unchanged during the year. South Africa’s monetary policy will continue to be considered accommodative. upwardly trending commodity prices as global growth gradually improves.
The South African government expects the main budget deficit to fall to an estimated 9.0% of GDP for fiscal year (FY) 2021/22 from a downwardly revised 12.3% of GDP in FY 2020/21. This fiscal target will be missed by a small margin and end FY 2021/22 at 9.8% of GDP. The main budget target is contingent upon the successful reduction in the government’s compensation bill. The 2021 national budget allows for a ZAR144.5-billion fall in the wage bill from FY 2021/22 to FY 2023/24 compared with the 2020 national budget estimates, with the biggest cut occurring in FY 2023/24 at ZAR72.0 billion. The debt servicing cost is expected to account for 21% of projected revenue over the 2021–23 period, while public-sector debt as percent of GDP is likely to reach the 100% threshold by 2026. The fastest-growing functions of the 2021 national budget are economic development, of which infrastructure spending received a ZAR93.1-billion allocation. The government’s fiscal targets hinge strongly on the containment of the public-sector wage bill and the limiting of any further financial transfers to embattled state-owned enterprises (SOEs). Public sector labor action and service delivery disruptions are assumed during 2021.

Upside potential is dependent on a potential investment rebound.

An aggressive drive by new ruling president Cyril Ramaphosa to secure USD100-billion local and foreign investment in the next five years could be the swing factor in near-term growth prospects. Strong private-sector investor spending could leave South Africa’s growth rate closer to 3.5% in the medium term.
Important binding constraints, including a high dependency on investment-related imports, higher inflation, inadequate infrastructure, and disruptive domestic political and labor market developments, will continue to prevail within the assumed higher private-sector investment scenario.

Renewable electricity program to ease chronic supply problems

South Africa’s potential growth rate has been slowing consistently in recent years and is expected to reach a meager 0.9% in 2022–23. The persistent electricity shortages have placed a significant damper on the country’s growth potential since 2015. Eskom, the state power producer’s total energy availability factor is currently set at 60.0%. Potential growth is furthermore weakened by a significant reduction in projected investment spending in the economy. Gross fixed capital formation currently accounts for 15.8% of GDP, which is significantly below the long-term average of 22.0% of GDP.
Electricity deficits could nonetheless be reduced in the medium term following the launch of the government’s Risk Mitigation Independent Power Producer Program (RMIPPP) and requested proposals under the Bid Window 5 Renewable Energy IPP Procurement Program on 18 March 2021. The RMIPPP is an emergency measure entailing the procurement of 2,000 megawatts (MW) of electricity from several energy sources to alleviate the country’s immediate electricity supply gap.
The successful bidders for the RMIPPP include a wide range of technologies, with a large contribution of liquefied natural gas (LNG)-based power alongside hybrid renewable options. IHS Markit analysts expect the successful bidders to meet the mandatory commissioning date of August 2022.
In June 2021, the President Cyril Ramaphosa released for public comment a notice that would lift the licensing threshold for small-scale power-generation projects from 1 MW to 100 MW. The new threshold would mean that entities that want to generate 100 MW or less of their own electricity could do so without applying for a license, although they would still be required to register with the National Energy Regulator of South Africa (NERSA). When implemented, this change will significantly reduce the red tape for small-scale power generation and mean many companies in the mining sector, in particular, will have a stable source of electricity.
Furthermore, Eskom has been successful in several recent court cases against NERSA, which previously prevented the utility from hiking tariffs. This means that the utility will now be able to hike tariffs over the next 12 to 18 months. Although these tariff hikes may result in localized protests in major townships in the Gauteng province, these are unlikely to be violent. However, the enhanced revenues will assist Eskom in paying down its debt of approximately USD33 billion. Eskom is, therefore, potentially better placed to dedicate more financial resources toward the maintenance of its aging coal-fired power stations. IHS Markit analysts thus expect this to lower significantly the frequency of blackouts by the end of 2022.

Main data releases incorporated in the update

ReX has been updated with the latest data available from StatsSA (incl. QLFS and GDP for 2021Q1), SARB QB, SARS and many more.

Crime data for the 2020-21 financial year is now available! The SAPS have released quarterly statistics for the past four quarters which is then aggregated to annual numbers in the ReX. There has been a significant reduction in crime for the first quarter of the year (first lockdown), but unfortunately the next three quarters saw crime levels rise to pre-covid levels, resulting in an annual figure where the reduction is not as clearly visible any more. Topics that are heavily dependent on information from the General Household Survey, such as household access to services, has finally been updated to 2019 data, after the release was postponed a couple of times by StatsSA. The Health (UHC) indicators and Fiscal module will only be updated later this year as they are dependent on data that has not been released yet.

Release Schedule

By sending out the current release so shortly after the previous we aim to align the current release schedule once again with historical schedules. The schedule for the rest of the year will be as follows: we will aim to release the quarter 3 version of ReX in the first week of October and the quarter 4 release will as usual be available in mid-December on request but primarily send out mid-January.

Significant Data Revisions

In addition to the data sources mentioned above, additional data has also been incorporated that has had specific impacts on the Regional GDP growths in the form of Regional Proxy variables. These include Fuel Sales Volumes broken down in spatially detailed areas and Building Plans Passed by Municipalities. Due to this new data for 2020 specifically, there has been some adjustments and revisions made to the data. We also updated and revised our geo-spatial coal mining database which did have some implications for the regions in the Mpumalanga province specifically.