South Africa’s economy at tipping point as outlook improves but political, energy risks remain

South Africa’s long-awaited economic reforms have begun to improve the country’s outlook, but political uncertainty and age-old problems of a failed power system still pose significant risks.

Economic reconstruction and recovery planning has been a key tenet of President Cyril Ramaphosa’s agenda since he replaced Jacob Zuma as the country’s leader in 2018.

The government says the suite of reforms – focused on energy security, infrastructure development, food security, job creation and green transformation – is designed to create a “sustainable, resilient and inclusive economy”.

And – some at least – appear to be working. S&P Global Ratings reaffirmed its positive outlook on the country earlier this month, saying government measures to encourage private sector activity could boost growth, and the measures had the potential to ease economic pressure.

“There is some hope in public finances in South Africa, mainly due to increased government revenue as a result of higher commodity exports, and progress made in reducing the debt and credit crunch and reducing the public deficit,” Alex Montana, an analyst at risk advisory Verisk Maplecroft for Africa told CNBC last week.

However, political weaknesses and persistent issues at the state-owned utility continue to present economic risks.

Montana said Ramaphosa was facing a “perfect storm of inflation, power cuts and corruption allegations that will continue to tarnish South Africa’s profile and pose a risk to investment in the country.”

A report into an alleged corruption scandal involving Ramaphosa is to be examined by the National Assembly on 6 December, just 10 days before the party conference of his ruling ANC (African National Congress).

energy crisis

Although Ramaphosa is expected to secure a second five-year term, Montana said he must improve his credibility on economic and anti-corruption reforms to advance his agenda. The economy also remains at risk from frequent disruptions in state-owned companies such as power utility Eskom.

South Africans have suffered rolling blackouts as Eskom – which has long been a thorn in the side of the country’s economy – faces reduced production capacity due to equipment failures and diesel shortages.

The company has warned that power outages, known as “load-shedding”, will continue for the next six to 12 months, and recently said it is working to obtain the diesel needed to run auxiliary power plants. There has been a shortfall of funds for those deployed during the period. peak consumption or emergency.

Montana said that in order to secure sustained economic growth, the South African government would need to prioritize energy sustainability.

“Energy will require financial support from international players, but they will also need to ensure it does not have a negative impact on South African society,” he said.

“In addition to the financial challenges, many South Africans are employed in Eskom or the fossil fuel sector, so the government will need to ensure that in their planning, they mitigate this potential impact of the transition from a fossil fuel based economy. For the implementation of renewables to maintain the stability of electricity.”

Asked about the issue on a recent state visit to the UK, Ramaphosa told CNBC’s Arbile Gumede that the problems at Eskom began long before 2014, when former President Jacob Zuma asked him to address the country’s energy problems. was appointed.

“As we are generating electricity, the power stations keep breaking down – many of them are old – but we are trying with a new boat, the management of which is to address this problem,” Ramaphosa said.

“So Eskom’s problems were seeds planted many years ago rather than 2014, and because we are dealing with huge, complex and intricate machinery, this is not a one-day solution, it may never happen because these are very complex processes.” “

He said the government was working to reduce load-shedding requirements and “make sure the money is there,” noting that Eskom “used to be the best utility in the world.”

He said, “Do I have confidence that we will solve these problems? Yes, I do. I have full confidence that we will solve them.”

“But I think it’s important to appreciate where we’ve come from, and obviously, it’s very easy to put all the blame on the president, put all the blame on the government, and yet these problems get in the way.” back from the past.”

‘Taking the demon’ of inflation

As well as domestic issues unique to South Africa, the country also faces the same inflationary pressures that have plagued economies around the world over the past year.

Annual headline inflation rose to 7.6% in October, defying expectations of the South African Reserve Bank to ease price pressures. This prompted the bank’s monetary policy committee to aggressively hike interest rates by 75 basis points last week, bringing the benchmark repo rate to 7%.

It was the seventh consecutive meeting at which monetary policy was tightened, and central bank governor Lesetza Kaganyago told a press conference that it should “tame the demon of inflation.”

With prices rising much faster than the central bank’s 3-6% target, Kaganyago said the SARB needed to see clear evidence that inflation had not only peaked, but begun a steady decline toward the midpoint of the range. Has been.

But further monetary tightening will put additional pressure on the economy.

“We think that with inflation unlikely to return within the target range (let alone the midpoint) in the coming months, policymakers are well positioned to tighten well into 2023,” said Virag Forijs, Emerging Markets Economist at Capital Economics. “

They said food inflation continued to rise, offsetting some of the effects of softening pressure on fuel prices, while core inflation is likely to remain elevated. Capital Economics expects inflation to peak at around 7.5% annually through early 2023 before falling markedly around the middle of the year.

Fories said the weakness of the economy is unlikely to prevent further rate hikes, with growth concerns playing second fiddle to inflation concerns. South Africa’s GDP contracted by 0.7% in the second quarter.

“While the end of the tightening cycle is not yet in sight, we expect the pace of tightening to slow down in the next MPC meetings,” she said.

Three MPC members voted last week to hike rates by 75 basis points, while two voted for 50 basis points. Some who voted for an increase of 100 basis points at the last meeting marked this as clearly dovish.

“Overall, we target another 100bp increase in the repo rate to 8.00% by Q2 of 2023,” Forijs said.