2024q1

Regional eXplorer (ReX) update – 1st quarter of 2024

S&P Global is glad to announce the first quarter update for 2024 of Region al 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:

South Africa's real GDP growth rate is expected to rise to 1.1% in 2024.
Medium-and long-term outlook.
Risk to the forecast
Main data release

South Africa's real GDP growth rate is expected to rise to 1.1% in 2024.

In 2023, the GDP was estimated at 0.6% however growth was forecasted for 2024 with an estimated real GDP of 1.1%. In the latter half of the 2023/2024 agriculture crop season there is an expected El Niño-related rain deficit. This may result in summer grains and oilseed harvests being 13% lower than the previous season. The harvest will be enough to meet the domestic demand however, exports of agriculture-related products will slow in 2024.

With less electricity disruptions and the introduction of two-pot pensions in the latter half of the year, are likely to result in temporary spurts of economic resilience during 2024. The utilization of the unrealized profits in the South African Reserve Bank’s (SARB’s) Gold and Foreign Exchange Contingency Reserve Account to finance the budget deficit in fiscal year 2024–25 will safeguard the local currency-denominated sovereign risk rating, especially if funds are utilized to pay down upcoming debt amortization obligations. There is caution from both local and foreign investors ahead of the 2024 elections with a real risk of African National Congress party losing majority vote for the first time since 1994.

Private-sector fixed investment will continue to find support from the renewable energy infrastructure expansion programs, with S&P Global Commodity Insights projections showing ongoing wind, solar and central power expansion investment under the Risk Mitigation Power Procurement Program and the Renewable Independent Power Producer Program. Kusile and Medupi power stations are expected to enhance improvement in electricity supply as a result of additional capacity at the two coal-fired power stations.

A slowdown in global economic growth combined with ongoing transport infrastructure bottlenecks will constrain South Africa’s export performance during 2024. Port congestion increased to 20 days of delay at the Durban port in November 2023. The backlog has improved at Durban post however, Cape Town port remains problematic.

Upside potential for the rand exchange rate remains limited, with South Africa’s National Treasury seeking supplementary financing options for the upcoming 2024-2025 national budget. The South African rand is expected to remain at 17.80-19.00 to the US dollar in 2024, broadly unchanged from 2023. 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 should stay at about 4.5% - 5.0%, with global inflation at about 2.0%-2.5%.

Political and global risks remain elevated. Global inflation and interest rate developments particularly in developed economies such as the US and eurozone, continue to pose a risk to South Africa’s near-term

economic outlook. Higher-for-longer inflation and interest rates in developed economies could leave the SARB interest rate cuts smaller and later in the year. The GDP growth estimate could also be revised downward consequently. Additionally, Market Intelligence analysts view that currency volatility and policy uncertainty will increase ahead of the 2024 national elections. Consensus suggests that the ruling ANC party will likely lose its 51% majority in parliament, forcing the party into possibly turbulent coalition negotiations over the next five years. Policy uncertainty under a coalition

between ANC and Economic Freedom Fighters (EFF) will increase significantly, although Market Intelligence analysts assume that smaller parties such as Good, Congress of the People (COPE) and others will be prioritized by ANC as coalition partners.

Medium-and long term outlook

South Africa’s medium- to long-term prospects hang in the balance. To stem the economic slide will require policy reforms, stronger institutions, renewed private sector investor interest and a build-back infrastructure rehabilitation and development programs. Instead, the country’s current development roadmap is outdated and has been overshadowed by inefficiencies, a deepening rent-seeking society, limited fiscal flexibility, loss in infrastructure and rising unemployment and poverty levels in the country. Political will is needed to implement growth supportive reforms while addressing state inefficiency and corruption. This has become a difficult task for the ruling African National Congress (ANC), who is progressively losing electoral support. The next election is scheduled for 2024. The country will become more vulnerable to adverse climate events, particularly floods and droughts, the loss of production and trade due to adverse energy policies, such as coal-fired electricity generation, and higher inflation due to localization policies.

The lack of access to reliable electricity is a massive drag on South Africa’s potential growth, with is set at 0% in 2023. Rolling blackouts have been prevalent in the economy since 2015 but gained significant momentum in 2022–23. Central bank estimates show that electricity disruptions of about 6 to 12 hours a day (loadshedding stage 3 to 6) detract around 204 million-899 million rand from daily economic activity. Potential growth is furthermore capped by weak total factor productivity growth and a smaller contribution from the labor market as unemployment levels accelerate to 36%. Capital accumulation improved somewhat during 2021–22 but was highly concentrated in the trade and, to a lesser extent, the mining industries.

Electricity rehabilitation and production expansion programs could lift potential growth to 1.5%. South Africa’s widening electricity deficit will likely attract the most investment interest by households and local businesses in the short term. Large energy users such as mines, manufacturers and the health industry will continue to make use of the suspension of the licensing threshold for private power generation projects. Unlocking financing to the amount of 34 billion rand for renewable energy projects (solar and wind) under Bid Window 5 and 12 billion rand under Bid Window 6, combined with the development of South Africa’s offshore natural gas deposits, is nonetheless essential to sustain and expand South Africa’s electricity capacity over the medium to long term. South Africa lacks sufficient distribution infrastructure, which continues to be a drag on the renewable energy and embedded power generation projects in the country. Expansion of private business and household energy infrastructure could leave potential growth at around1.5% over the medium term.

We maintain long-term growth projection at 2.5%. Achieving this potential growth objective — which will allow for a consistent improvement in real per capita income for the general population — will require a much broader private sector participation to overall fixed investment. Businesses will expand operation to benefit from preferential access under the African Continental Free Trade Agreement (AfCFTA), investing in renewable energy projects, South Africa’s vast critical minerals deposits, expanding tourism industry, and highly developed financial and other business services, including technology. South Africa’s tax collection systems still rank among the best in the world. The same applies to the highly developed and well-regulated financial system, which includes the Johannesburg Stock Exchange (JSE). Although infrastructure bottlenecks have become apparent in recent years, the country’s road, rail, and port facilities are the most developed in the region. The judicial system remains solid, and the skills pool diversified, while high ranked tertiary institutions position South Africa well to reap the benefits of the regional economic strength foreseen in coming years.

Risk to the forecast

Downside risks in the economy remain prevalent in the short term. The government spending rationalization programs, which include the public-sector wage bill and state-owned enterprise (SOE) inefficiencies. Public-sector debt levels escalate above current expectations, triggering further sovereign credit risk downgrades by international rating agencies, crowding out of public investment, and deterring long-term growth prospects.

“Populist” policies such as land redistribution disrupt the agricultural production supply chain and jeopardize property rights in the economy. Ongoing adverse weather conditions pose an additional threat to low food prices, hence risks raising inflation and lowering purchasing power — with particularly dismal consequences for low-income households.

The impact of rising bond yields in the developed world results in a sharp swing in portfolio flows out of emerging markets, including South Africa. Such an outcome could mean higher inflation and interest rates than the baseline assumption. Private-sector investment is delayed owing to mounting concerns about property rights, social unrest, and electricity supply.

South African loses preferential trade access to the US under the African Growth and Opportunity Act (AGOA) due to increasingly strained US-South Africa political relationship. US suspends financing for the South Africa renewable energy program.

Some upside risks are that international commodity prices move above the baseline outlook; this improves the growth and exchange rate outlook in the South African economy. Furthermore, the government has been partially successful in attracting $100 billion in local and foreign investments in the next 5 years. This includes electricity-generating investment in renewable programs such as solar, wind and hydrogen.

Main Data releases incorporated in the update

2023 data is now available: ReX has been updated with the latest data available from StatsSA (incl. QLFS and GDP), SARB QB, SARS and many more that allowed us to model and incorporate 2023 data on a sub-national level for most modules in ReX for the following modules:

Demographics - Language
Development
Labour
Income & Expenditure
Economics
International Trade
Tourism