2024q4

Regional eXplorer (ReX) update – 4th quarter of 2024

S&P Global is glad to announce the third 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:

1. Policy reforms are likely to boost South Africa’s real GDP growth to 1.1% in 2024 and 1.8% in 2025.

2. Medium-and long-term outlook

3. Risk to the forecast

4. Main data release incorporated in the update

Policy reforms are likely to boost South Africa’s real GDP growth to 1.1% in 2024 and 1.8% in 2025.

S&P Global Market Intelligence revised South Africa’s real GDP growth estimate upward to 1.1% for 2024 and 1.8% for 2025. Policy reforms addressing the most pressing infrastructure bottlenecks in energy, ports, railway and skills availability combined with the introduction of a two-pot retirement system underline the growth revision. Additionally, the outlook has seen an increase to 62.3% in Eskom’s Energy Availability Factor in June 2024 supporting real GDP growth in 2024-25.

The new two-pot retirement system, which gives pension fund holders early access to a small portion of their preretirement savings pool (maximum of $1,400 in the fourth quarter of 2024) is likely to bring down household debt commitments and boost consumer spending. Improved consumer sentiment following the May elections, along with widening real income levels resulting from a decline in headline inflation and lower interest rates, is furthermore expected to support household spending. S&P Global Market Intelligence analyst further revised fixed investment spending for 2025 upward to 5.6% from 3.6% previously. Policy reforms, which will boost private-sector participation in energy provision, port facilities and railway services, are likely to strengthen real fixed capital formation in the near to medium term.21

The new Electricity Regulation Amendment Bill, signed into law in August 2024, aims to facilitate the transition of South Africa’s power sector into a multimarket model for electricity trading and the unbundling of state power producer Eskom into separate divisions for transmission, generation, and distribution. Projections from S&P Global Commodity Insights indicate a substantial investment pipeline for wind, solar and central power projects. The implementation of renewable energy expansion initiatives may be constrained by the lack of sufficient electricity distribution capacity and limited scope for additional state guarantees to Independent Power Producers, nonetheless.

Resilient global economic growth expected for 2024–25 will partly offset the impact of the ongoing transport infrastructure bottlenecks on South Africa’s export performance during 2024–25. In March 2024, state logistics provider Transnet Freight Rail (TFR) announced that the state-controlled railway network will be opened to private sector participation under Public-Private Partnerships. Benefits of this reform on transport bottlenecks will be only visible toward the end of 2024–25, should legislation be implemented successfully, and private-sector bidders enter the market.

The rand has strengthened against the US dollar since April 2024, dropping to a low of 17.09 rand per US dollar in late September, down from 19.25 at the end of April 2024. A post-US election surge in the US dollar left the rand vulnerable against the greenback in November, falling back to 18.08 rand per US dollar. An increase in USprotectionism, through the adoption of higher tariffs, faster deportation of immigrants combined with the extension of tax cuts, could leave US inflation and interest rates higher for longer and the US dollar stronger than initially expected. Our revised rand exchange rate forecast, which will take these factors into consideration, will be available during the December 2024 update.

Medium-and long-term outlook

Policy reforms are likely to boost South Africa’s real potential growth rate to 2.3% - 2.5% over the long term. The formation of the Government of National Unity (GNU) after the May 2024 elections is set to advance policy reforms in South Africa’s energy, ports, and railway sectors, while addressing critical skills shortages through visa reforms. Increased private-sector involvement in renewable energy, port operations and railway access are expected to enhance gross capital formation via infrastructure development, ultimately bolstering South Africa’s long-term growth potential. Additionally, South Africa stands out in Sub-Saharan Africa for its favorable demographic dividend, with a larger working-age population compared to non-working individuals bolstering potential growth over the long term. Businesses are furthermore likely to expand operations beyond infrastructure development to leverage preferential access under the African Continental Free Trade Agreement (AfCFTA), investing in critical mineral deposits, the tourism sector, and advanced financial and technology services.

Prudent fiscal and monetary policies likely to ensure economic stability. Economic stability will be ensured through the implementation of sound monetary and fiscal policies. S&P Global Market Intelligence anticipates that the South African Reserve Bank (SARB) will maintain its independence, focusing on currency stability and keeping inflation within the 3%-6% target range while ensuring the health of the financial sector. Over the long term, the SARB is expected to lower its unofficial inflation target from 4.5% to 3.0% to align inflation with that of South Africa’s major trading partners. Fiscal transparency is projected under the Medium-Term Expenditure Framework (MTEF), with South Africa ranked among the top three countries globally for transparency by the International Budget Partnership. A binding fiscal anchor, such as a stabilizing primary budget surplus, is likely to emerge in the short to medium term to promote fiscal consolidation and reduce the risk of fiscal imbalances and public-sector debt instability.

Low savings will leave South Africa reliant on foreign direct investment (FDI) to achieve growth objectives. The disparity between savings and investment will result in South Africa depending on FDI, necessitating the maintenance of regional competitiveness to attract capital into the country. Investors can take confidence in South Africa’s favorable business environment. The country has a highly developed and well-regulated financial system, including the Johannesburg Stock Exchange (JSE). While infrastructure bottlenecks have emerged in recent years, South Africa’s Road, rail, and port facilities remain the most advanced in the region. The judicial system is robust, and the diverse skills pool, along with top-ranking tertiary institutions, positions South Africa to capitalize on the anticipated regional economic growth in the coming years.

Political developments continue to pose the biggest risk to South Africa’s long-term prospects. Delays in implementing essential policies to address infrastructural bottlenecks pose a risk to our long-term outlook. While markets welcomed the formation of the GNU in 2024, the potential for a coalition collapse within five years remains a concern. Additionally, policy paralysis may occur due to significant differences in political ideologies regarding growth and ministerial objectives. South Africa is one of the most unequal societies in the world, leaving the risk for social unrest and pressure for social support programs high. State inefficiency, public-sector brain drains, the collapse of service delivery on municipality level, high crime statistics and a vulnerability to adverse weather conditions continue to pose a risk to South Africa’s long-term prospects.

Risk to the forecast

The political party participation in the Government of National Unity (GNU) is expected to ensure policy continuation in areas such as fiscal, monetary, energy, transport, labor and mining. The ongoing implementation and broadening of reforms could strengthen South Africa’s near-term prospects beyond the current baseline.

There are several downside risks to the current economic forecast;

The GNU established after – the May 2024 elections unravels owing to policy diversity and lack of consensus among political parties. President Cyril Ramaphosa resigns, and policy and political uncertainty deter domestic and international sentiment. Policy reforms in energy, transport, mining, and labor stall.
Private-sector portfolio and fixed investment are delayed owing to mounting concerns about property rights, social unrest, and electricity supply.
Ongoing adverse weather conditions pose a threat to low food prices, and hence risks raising inflation and lowering purchasing power — with particularly dismal consequences for low-income households.
South African loses preferential trade access to the US under the African Growth and Opportunity Act (AGOA) owing to increasingly strained US-South Africa political relationship. The US suspends financing for the South Africa renewable energy program.
The government delays 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, being crowded out of public investment, and deterring long-term growth prospects.
An increase in US protectionism, through the adoption of higher tariffs, faster deportation of illegal immigrants combined with the extension of tax cuts, could leave US inflation and interest rates higher for longer and the US dollar stronger than initially expected.

However, there are upside risks to the current forecast. The GNU leadership may launch a series of reforms and policy actions to address the weaknesses in the education system, loss in international competitiveness, the mining charter, and the financial viability and leadership of SOEs. Lastly, International commodity prices move above the baseline outlook; this improves the growth and exchange rate outlook in the South African economy.

Main data releases incorporated in the update

ReX has been updated with the latest data available from StatsSA, and SARB. The main data updates from the past quarter included the latest Quarterly Labour Force Survey (QLFS 2024Q3), and Quarterly Crime.

In 2024 quarter 3, the National quarterly GDP decreased by 0.3% with agriculture, forestry and fishing sector decreased the most and contributed to -0.7 percentage points to the decline on GDP growth. A similar pattern can be discerned at a provincial level, with agriculture, forestry and fishing sector contributing the most to a decline in regional quarterly GDP.

Northern Cape had the largest decline, -1.8%, in their GDP for the third quarter. This can be attributed to the contributions agriculture activity has in the region, as shown below. Inversely can be said for Gauteng, whose economy relies largely on the financial sector that saw an increase of 1.3% nationally over the last quarter. The province also had a very small contribution from the agricultural sector, ultimately leading to it being the only province that saw a growth in quarter three of 2024.