2021q3

Regional eXplorer (ReX) update – 3rd quarter of 2021

IHS Markit is glad to announce the third 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:

  1. Rebasing of South Africa's GDP leaves public-sector debt lower than before
  2. Near-term Economic Outlook
  3. Main data releases incorporated in this update

Rebasing of South Africa's GDP Leaves public-sector debt lower than before

National statistical agency Statistics South Africa (Stats SA) released rebased GDP figures for the South African economy on 25 August. South Africa’s rebased GDP will improve some macroeconomic fundamentals, but the figures indicate that the economy is now more reliant on households as a source of growth than before.

For the rebased South African GDP figures, Stats SA used new data sources, methods, and benchmarking to reflect the price and structural changes in the country’s economy over time, while revising the base year to 2015, from 2010 previously. The benchmarking exercise left the economy 9.2% larger in the new base year of 2015, as measured by GDP at current prices, compared with the base year of 2010. “In the 10 years between 2011 and 2020, the percentage difference between the previous and revised levels averaged 9.6% and ranged between 8.6% in 2014 and 11.0% in 2020, all based on current prices,” StatsSA reports. Revisions to the annual growth rate of the GDP deflator vary from 0.8 percentage point in 2010 to minus 0.6 percentage point in 2011–12. On average, the growth rate of the revised GDP deflator is higher over the 2017–18 period, contributing to the upwardly revised nominal GDP levels in the economy.

On the supply side, in the rebased figures, the biggest GDP revisions occurred in the finance, real estate, and business services sector (26% higher), general government services (45% lower), and personal services (206% higher). “The steep fall in general government and sharp rise in personal services are closely linked,” StatsSA reports. Education and healthcare activities have now been reclassified under personal services, from general government previously, reflecting a change in methodology and better access to information. The reclassification is also in line with recommendations made in the System of National Accounts of 2008.

On the demand side, in the rebased figures, household spending’s contribution to GDP increased to an average of 63.3% for the period of 2010–20, from 59.9% previously, while the contribution of fixed investment spending declined to 17.0% of GDP, from 19.0% of GDP previously. Government consumption is lowered marginally to 19.1% of GDP for the same period, from 20.8% of GDP. In the revised GDP numbers, there were falls in the contributions of exports of goods and services (27.6% of GDP, from 30.2%) and imports of goods and services (27.4% of GDP, from 29.9%).

The revised nominal GDP number lowers the South African government’s public-sector debt holdings to 57.4% of GDP in fiscal year (FY) 2019/20, from 63.3% of GDP previously. In addition, the medium-term public-sector debt trajectory has become more favourable, with public-sector debt as a percentage of GDP ending FY 2023/24 at 81%, from 88.3% of GDP previously, assuming all other variables besides the rebased GDP remain unchanged. The current-account deficit as a percentage of GDP is also now lower, at 2.8% of GDP, from 3.1% of GDP previously, for 2010–20.

Changes to the real GDP figure leave the contraction in economic activity during 2020 smaller than previously reported. StatsSA now shows a 6.4% fall in GDP during 2020, from a 7.0% slowdown previously. The revised real GDP number leaves the South African economy 3.1% smaller in the fourth quarter of 2020 compared with precoronavirus disease 2019 (COVID-19) pandemic levels. Pre-adjusted GDP placed economic activity 4.4% below pre-COVID-19 levels in the fourth quarter of 2020.

The rebasing of South Africa’s GDP is beneficial for some of the country’s macroeconomic fundamentals, such as the ratios of public-sector debt and the current account balance to GDP, now lower than previously estimated. Nominal GDP per capita will also show a marginal improvement; the fiscal balance as a percentage of GDP will show a smaller deficit. The lower public-sector-debt-to-GDP ratio and higher GDP per capita bodes well for South Africa’s credit risk ratings, which, in IHS Markit’s view, will remain unchanged over the 12–18-month period. The GDP rebound in 2021 could also be stronger than initially expected if the first-quarter 2021 quarter-on-quarter (q/q) growth rate, published earlier, remains unchanged.

South Africa’s rebased GDP for the first half of 2021 is due to be released on 6 September. However, the structure of the South African economy now suggests a stronger dependency on the household sector as a source of growth. Both fixed investment and exports of goods and services are making lower contributions, which does not bode well for South Africa’s potential GDP, reliant on capital stock accumulation, labour, and productivity. A lower potential GDP will close the current negative output gap in the economy faster. The timing of the next policy rate change by the South African Reserve Bank (SARB), which is tilted towards the

upside, will become an extremely difficult decision. Higher global interest rates in developed and developing economies, combined with price pressures building because of a smaller output gap, will have to be balanced against the dire labour market conditions and fragile recovery in growth amid the lingering COVID-19 virus pandemic and social unrest. South Africa recorded a 34.4% unemployment rate during the second quarter and IHS Markit is of the view that the country’s worsening unemployment problem could continue to fuel social unrest, especially ahead of the upcoming municipal elections.

The South African rand made up some of its losses against the US dollar in recent days. The rebased-GDP release was exchange-rate neutral, however, with little change in the currency following the release.

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    Near-term Economic Outlook

    Social unrest may lower South Africa’s growth prospects by 0.3 percentage point to 4.3% in 2021.

    • The disruption in business operations owing to localized social unrest in the KwaZulu-Natal (KZN) and parts of Gauteng provinces during July combined with COVID-19-related lockdown measures have altered IHS Markit 2021 growth prospects for the South African economy. IHS Markit analysts now expect GDP growth to average 4.3% in 2021 from 4.6% previously.
    • IHS Markit Purchasing Managers’ Index (PMI) for July shows the severity of these recent events on overall economic activity. At 46.1, the headline PMI® was down from 51.0 in June and below the 50.0 nochange mark for the first time in ten months. The latest reading pointed to renewed declines in new orders, employment, and stocks of purchases as well as a much sharper fall in output. Many businesses reported scarcities of raw materials.
    • A government support program to avoid job losses and ensure the rebuilding and restocking of business operations affected by the social unrest become operational in August. The additional government spending will be financed by utilizing some of the government’s revenue overrun assumed for 2021. Payment priorities include the recapitalize of state-insurer Sasria to meet unrest claims (ZAR3.9 billion), financial support to businesses not covered for social unrest (ZAR2.3 billion), and the expansion of the ZAR5 billion tax incentive to encourage employers to hire and retain staff. The Unemployment Insurance Fund (UIF) has also set aside additional funding for temporary unemployment affected by social unrest to the amount of ZAR5.3 billion. The Basic Income Grant (BIG) for the more permanently unemployed has once again been reinstated until March 2022, expected to cost government an additional ZAR26.7 billion in fiscal year (FY) 2021/22.

    • The income protection programs for households and businesses could alleviate the full impact of the social unrest on the economy. However, an additional 50,000 people could be added to the unemployed during the third quarter as small and medium-size businesses struggle to resume their operations while some retail outlets remain permanently closed. South Africa already shed 1.2 million jobs in the aftermath of the COVID- 19 lockdown measures introduced in 2020. The rising number of unemployment has cap nominal annual gains in the average wages paid during the first quarter of 2021 at 3.2% year on year (y/y) while rising inflation will curtail real gains in household income. Pent-up demand combined with low interest rates continue to provide support to durable spending in the economy, with pre-COVID-19 levels already exceeded by the first quarter of 2021.
    • The rehabilitation of infrastructure damaged or destroyed during the social unrest will provide a short‑to‑medium term boost to fixed investment spending and retail stock replenishment. An upward shift in South Africa’s country risk rating bodes nonetheless negative for future investment costs and spending while pipeline investment programs could be delayed owing to ongoing security concerns. A landmark government announcement that lifts the licensing threshold for small-scale power-generation projects from 1 megawatt (MW) to 100MW is still expected to unlock private investment in the renewable energy segment of the economy from 2022 onward and is expected to attract investor interest from mines, motor vehicles assembly lines, and the health sector in particular.
    • South Africa’s exports will continue to benefit from the gradual recovery of global growth after the short disruption in port activity experienced during July. Resilient global commodity prices and stronger global trade are likely to prop up export earnings during 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.

    Social unrest is unlikely to deter the South African Reserve Bank’s (SARB’s) interest rate path.

    • Rand exchange rate volatility continues. The rand gained more than 7% against the US dollar in 22 August–10 September after which the currency gave up some of these gains to end 2.6% weaker against the greenback by 16 September. Overall, the rand strengthened by 11.5% against the US dollar during the first eight months of 2021. Changing investor sentiment steered by the unfolding inflation backdrop in developed economies, a strong current-account backdrop and lower purchasing power parity rate supported the rand trajectory during 2021.
    • 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 ZAR’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 ZAR in the longer term. Upside pressures on the ZAR, 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 in South Africa is expected to move up during 2021 but is likely to remain close to the midpoint of the SARB’s inflation target range of 3–6%. The low base year of comparison, higher global food and oil prices combined with rising electricity cost are likely to spur local price pressures. A negative output gap plus vulnerable economic recovery anticipated during 2021 should keep the policy rate unchanged during the year.
    • Despite the higher government outlays linked to the social unrest, a tax windfall from the mining industry during the first quarter of FY 2021/22 suggests that a significant government revenue overrun of ZAR80 billion could be achieved for the whole fiscal year. Higher fiscal capture from mining looks more than sufficient to finance the government’s additional spending commitments and leave the fiscal deficit at an estimated 8.4% of GDP (versus 9.0% of GDP previously forecast by the government). The country’s fiscal deficit remains nonetheless unsustainably high and could rise even further if global commodity prices move sideways or decline and South Africa’s GDP returns to its potential longer-term projected growth path of 1.5‑2.0%. IHS Markit analysts project that public-sector debt-to-GDP could reach 90% by FY 2023/24 from 83.5% in 2020/21.
    • KZN, the province mostly impacted by the recent social unrest, accounts for 16% of South Africa’s overall real GDP while the eThekwini Metropolitan Municipality accounts for 60% of the province’s real GDP and 53% of the province’s employment. The province’s community services, financial, manufacturing, and transport industries account for roughly 69% of KZN’s total real GDP and 72% of eThekwini’s total real GDP. Retail trade, the sector expected to have suffered the biggest disruption in economic activity in the province in the short term, accounts for 14% of KZN’s overall GDP. However, trade is a large provider of employment in KZN, accounting for 22% of total employment in the province, of which 34% is estimated to form part of the informal sector.

     

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    Main data releases incorporated in the update

    This quarter has seen some big changes to ReX as a number of modules have been updated with the latest data available. Among these updates three modules that we will highlight in this newsletter will include: Demographics, Economics, Tourism.

    The Demographics module has been revised this quarter again by looking into a number of key assumptions that feed into the Population Projection estimates:

    • StatsSA did release their 2021 mid-year estimates.   This was the first release that included the demographic impact since the start of the global pandemic.   The previous release of the mid-year estimates was published during the pandemic, but at that point in time the demographic impact was not significant yet, and the future was very unclear with lots of unknowns. 
    • At this point in time, we have to rely on academic studies and updates that estimates the impact on births, deaths, migration, etc.   The formal administrative data will only be released much later.  The restrictions due to COVID also affected the regular data collecting, which complicates the matter even more.  
    • IHS Markit assumes that the biggest demographic impact of the pandemic is a reduced life expectancy, resulting in about 150k more deaths in 2021 compared to 2020.
    • Migration was slow and/or delayed due to lockdown regulations, affecting both white-emigration, as well as African and Asian immigration for 2021.  
    • The population changes directly impact some variables downstream:  reduced population growth, slower household formation and a reduced Human Development Index.  On top of this we also have lower employment levels, lower GDP growth with a resulting less income and increased poverty in 2021. 

    In terms of updates in the Economics module, the recent GDP benchmarking exercise delivered the rebased national accounts data from 2010 base year to 2015 base year that has been incorporated into ReX. The following changes can has been made to the ReX database:

    • There was a structural change on how public education and public hospitals are treated.  Previously this was part of Government Services, but this was now moved under Personal Services.   The good news is that this did not have a significant impact on the structure of the ReX numbers, as we have always estimated this split on our side.  The official numbers will make it slightly easier going into future. 
    • The GDP-R (by Province) dataset that was published as part of the annual GDP publication, was placed on hold by StatsSA.   There are ongoing discussions on this, on what the best way forward would be.  For the interim IHS Markit have adjusted the old GDP-R releases to the new 2015 levels, taking into account some of the structural shifts that was part of the 2015 rebasing.
    • Aside from the structural shift on the sectoral side and the new 2015 base year levels, the overall methodology used to estimate regional GVA and GDP has remained the same and in terms of GVA growth rates on constant prices has also remained very robust, the most significant changes in the growth rates can be seen on the 2020-2022 forecast horizon on the GDP-R (provincial) level where we included our latest predictions of provincial sectoral growth forecasts. 

    During the past quarter we also incorporated the underlying data of the Domestic Tourism Surveys (DTS) that only became available recently.   The official publications were released some time back already, but this contains only a limited set of information which is used in the Tourism Model.   The underlying data was delayed a couple of times, but we finally got hold of this data, which resulted in some historic revisions.    The 2020 estimates are still mostly based on very limited data and includes a number of COVID-assumptions. 

    Unfortunately, the General Household Survey has been delayed again and is not available to be incorporated into this release, topics that are heavily dependent on this information, such as household access to services, will only be released later this year along with the Health (UHC) indicators and Fiscal module.

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    Enjoy the update!
    The IHS Markit ReX team

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