major macro economic indicators
|2014||2015||2016 (f)||2017 (f)|
|GDP growth (%)||1.7||1.3||0.3||0.8|
|Inflation (yearly average) (%)||6.1||4.6||6.2||6.0|
|Budget balance (% GDP)||-3.6||-3.6||-3.5||-3.5|
|Current account balance (% GDP)||-5.3||-4.4||-3.3||-3.4|
|Public debt (% GDP)||46.9||49.8||50.5||52.4|
(e) Estimate (f) Forecast
* fiscal year : April to May
- Regional/continental economic and political power
- Rich in natural resources (gold, platinum, coal, chromium…)
- Developed services sector (especially financial services)
- Legal system provides protection for investors
- Poverty and inequality are sources of social risk (crime, strikes and protests)
- High unemployment (27%, 54% for those aged 15- 24) and shortage of skilled labour
- Infrastructure shortcomings (transport, energy)
- Dependence on volatile flows of foreign capital
Sluggish economic recovery, threatened by a credit rating downgrade to “speculative status”
South African growth is expected to remain very weakly positive in 2017. Agricultural activity, badly hit by drought in 2016, is showing some signs of improvement amid more favourable weather conditions. The Crop Estimates Committee forecasts a 72% increase for summer crops in 2017. Moreover, infrastructure projects could sustain construction and the industrial sector.
Nevertheless, the brakes on growth and uncertainties over the country's economic development are still significant, however. Industrial production could be jeopardized by the lack of competitiveness and persistent problems with electricity supply, despite the improvement observed since 2016, as well as low prices for mining products. In contrast, household consumption, traditional driver of the economy, is expected to suffer from the historically high level of unemployment (26.5% in late 2016).
The credit rating agencies’ decision to downgrade South Africa into "speculative" category, following the dismissal of the Minister of Finance, is a further blow to the country's growth prospects. Indeed, the rand depreciation (losing in particular 12% between March 24 and April 10, 2017) should fuel inflation, which would weigh on already morose household consumption. The proposed introduction of a national minimum wage, evoked for the second half of 2017, which might have favoured a renewal of private demand, should not be put in place before May 2018. Household and business confidence should therefore be eroded. Moreover, the deterioration in the "speculative" category also sends a negative signal to investors and could discourage them from investing in the coming months.
The political uncertainty arising from the dismissal of the Minister of Finance, both for the ANC, which has been in power since the end of apartheid, and for the country also weakens the prospects for growth. With low growth and inflation still above 6% in the first quarter of 2017, stagflation looms in South Africa.
No room for manoeuvre in terms of budget and persistent current account deficit
Sanctioned by a credit rating downgrade, the South African government has paid its inability to bring its budget deficit under control and to stabilise its debt since the 2008/2009 crisis. The loss of its “investment grade” status entailed by this downgrade will also have a direct impact on interest rates and will increase the of debt servicing, which already accounted for a growing share of expenditure (11.2% of spending for fiscal year 2016/2017). In order to reduce the fiscal deficit, the budget for fiscal year 2017/2018, presented by Finance Minister Pravin Gordhan one month before being sacked, included a tax increase of 28 billion Rand (2 billions of dollars). The latter also announced the reduction of the expenditure ceiling of 10 billion rand. Despite the commitment of the new Finance Minister, Malusi Gigaba, to pursue the budget consolidation efforts of his predecessor, his task will be hampered by the weakness in economic activity. Indeed, the weak economic growth could limit government income, while current spending is likely to remain fairly stable and the government remains committed to the realisation of infrastructure projects.
The current account balance is expected to stabilise in 2017. Exports, dominated by mining products (particularly gold and platinum), which account for almost a third of the total, are not expected increase much. Commodity prices, although more positively oriented than in recent years, are unlikely to increase greatly. Moreover, growth on South Africa's principal markets (China, EU), is expected to be moderate. The slight increase in the oil price is likely to push up imports.
A large current account deficit, uncertainties over economic and political development and the prospect of the rise in US interest rates, is likely to maintain the downward pressure on the rand in 2017. Capital inflows oscillations are expected to nurture the exchange rate volatility of the South African currency, which has already taken a hit from the loss of the “investment grade” status , especially as the central bank’s leeway for raising its key rate (7% since April 2016) is much reduced on account of the low growth rate.
The banking sector, well capitalised and little exposed to exchange rate risk, remains strong, with a low ratio of non-performing loans (around 3%). Credit risk could, nevertheless, increase in view of the impact of the economic slowdown on borrowers' creditworthiness.
Persistent political tensions and a degraded business climate
President Jacob Zuma’s authority, re-elected after the ANC’s comfortable victory in 2014, is contested as never before after he sacked his respected Finance Minister, Pravin Gordhan, in a controversial cabinet reshuffle. Main guarantor of fiscal discipline in the eyes of investors and international institutions, the latter was at odds with J. Zuma on probity since he was appointed in rocambolesque circumstances in December 2015, especially as allegations of misappropriation of public funds and collusion with the business community against the President are piling up. Nevertheless, J. Zuma has survived no-confidence votes so far and should remain in power, at least, until the ANC convention in December 2017, when his successor as head of the party will be appointed. Internal divisions worsened after his decision to sack Pravin Gordhan and could critically sap his authority on the ANC, which has governed South Africa since the apartheid ended in 1994. Simultaneously, the persistent failure to respond to the people’s expectations on unemployment, poverty and corruption remains a source of social instability. Demonstrations, with tens of thousands taking to the streets to ask for J. Zuma resignation, highlights this rising political and social tensions.
Yet, South Africa’s performances are satisfactory according to the World Bank’s governance indicators, but are on a deteriorating trend with regard the rule of law (86th in 2015, i.e. ten places lower in a year). Crime levels and corruption are also handicapping the business environment.
Last update: April 2017