South Africa’s economic and social challenges are mounting. Given the unprecedented energy crisis and increasingly binding infrastructure bottlenecks, coupled with a less favourable external environment, the economy risks entering a period of stagnation.
This is the sobering assessment of the state of South Africa by the International Monetary Fund (IMF). The lender recently downgraded its 2023 growth forecast for South Africa from 1.2% to 0.1%, joining the Reserve Bank (on 0.2%) and Citi (0%) in being among the gloomiest forecasters on South Africa.
The Thomson Reuters consensus has also shifted sharply downwards. In February the consensus was that the economy would grow by 1% this year. The March consensus is for growth of just 0.4%, but the range from -0.4% to +1.3% is unusually wide, reflecting uncertainty over just how bad load-shedding could get.
Last month, the Bank lowered its already bleak 2023 growth forecast from 0.3% to 0.2%, citing the expected drag from extensive load-shedding and logistical constraints. It estimates that this year these two issues alone will deduct two percentage points from growth.
It expects South Africa to have 250 days of load-shedding this year, 150 days in 2024 and 100 days in 2025. (The cost to the economy varies between R0-R1.2m for stages 1 and 2, and R204m-R899m for stages 3 to 6, when continued on a 24-hour basis on weekdays.)
The Bank’s March monetary policy committee statement notes that not only are load-shedding and uncertainty weighing heavily on consumption and investment, South Africa’s commodity export price index is easing.
The Bank expects it to decline by about 20% this year and by a further 12% in 2024, before stabilising in 2025. However, it notes that commodity prices could do better if China’s recovery is stronger than expected.
On the upside, the Bank expects household spending and investment to grow modestly this year, driven in large part by the efforts of firms and households to install alternative energy solutions.
In a recent survey of its members, the Steel & and Engineering Industries Federation of Southern Africa (Seifsa) found that almost 80% had invested a combined R986m in alternative energy solutions over the 12 months to February.
Given that the survey was done before the National Treasury announced tax incentives to boost the uptake of renewable energy in the 2023 national budget, this number could well rise.
Unfortunately, most Seifsa firms surveyed invested in generators (not solar power), which raised their monthly input costs by 25% as they had to burn diesel. Worse, 43% of survey respondents cancelled other planned investments, worth R2.64bn, over the same period, while 24% shed a combined 9,432 jobs — all as a direct result of load-shedding.
Citi economist Gina Schoeman says it’s possible that the country is already in a technical recession, with growth having contracted by 1.3% quarter on quarter in the final quarter of last year.
Incoming data for the first quarter of 2023 suggests that another negative print could be on the cards, with the risk that the second quarter could remain negative.
“As South Africa faces the headwinds of global growth challenges, worsened by recent global banking stress, the signs are already there that the benefit of falling commodity prices is disappearing, with the current account back in deficit and likely to worsen through the year,” says Schoeman.
South Africa’s 2023 growth consensus has dropped to close to zero on intense load-shedding
— What it means:
But what is really driving her bleak view that GDP will go to zero this year is the severity and persistence of power outages.
“The trickiest bit for energy supply will likely be in the upcoming winter months, given the need to repair vital units at some coal plants, continue to procure diesel, and accelerate private sector self-generation,” she says.
This means that what happens in the second half of the year will be key in determining whether the country can avoid negative GDP growth for the year as a whole.
Based on a conservative reading of the government’s load-shedding reduction plan — which includes a quick fix to Kusile’s collapsed chimney, worth up to 2,880MW, plus at least 1,000MW of private generation that is in the pipeline — Schoeman says South Africa could realistically reduce load-shedding by three whole stages by the end of the year.
However, a new constraint is clouding the horizon — concern over continuity in the country’s politics.
Specifically, there is now a question mark over how long President Cyril Ramaphosa will remain in office after the 2024 elections, given his weak-kneed cabinet reshuffle, lingering discontent over the Phala Phala scandal, and his own apparent willingness to resign over the matter.
But the really big fear is that an ANC-EFF coalition could form after the 2024 election if the ANC performs poorly at the polls.
“If you don’t know what the continuity of politics will look like, it’s hard to make an investment case for South Africa,” says Schoeman. “We speak to really big corporates all the time, and these are the things they’re talking about. How do you do capex outside renewables when you are very unsure about the politics?”
Inviting the private sector in really is a game-changer
— Gina Schoeman
Over the medium term, South Africa’s growth rate is expected to rebound but remain below 2%. The consensus expectation is that growth will recover to 1.5% in 2024 and 1.8% in 2025. The IMF is looking for growth to hover at about 1.5%, while the Bank expects growth of only 1% in 2024 and 1.1% in 2025.
Though rising, these growth rates remain far too low. With population growth rates of about 1.2% annually, it means living standards will barely improve or will continue to fall, as they have done on average since 2014.
In its recent staff report on South Africa, the IMF attributes the country’s low growth to its failure to get on top of long-standing structural impediments such as product- and labour-market rigidities and skills shortages. It expects these to offset the expected growth lift from improvements in energy supply and higher private spending on energy-related infrastructure.
Governance and corruption “vulnerabilities” also weigh on growth and employment prospects, threatening social cohesion, the IMF says. In addition, elevated public debt significantly limits the fiscal space available to respond to economic and climate shocks and meet social and developmental needs.
In short, the IMF warns that “South Africa’s economic and social challenges are mounting” and that the economy risks stagnation.
Things could turn out worse than expected, it warns, if there is a deeper and more protracted global slowdown that further weakens commodity prices and/or a shift in global investor sentiment away from emerging markets.
Domestically, the downside risks flagged by the IMF include the possibility of delays in addressing the energy crisis and Eskom’s and Transnet’s operational and financial weaknesses; slower than expected progress or a reversal of reforms, including with regard to fiscal consolidation; and increased political uncertainty.
On the upside, the lender accepts that fiscal and structural challenges continue to be tackled, including through the presidency and Treasury’s Operation Vulindlela, and that the government has made “important headway” on the policy side.
Progress includes the removal of licensing requirements for embedded power generation, plans to facilitate private sector participation in transmission infrastructure and steps to improve third-party access to the country’s ports and freight network.
“Inviting the private sector in really is a game-changer,” acknowledges Schoeman. “This creates upside risk to my forecast as there really is a lot in the pipeline and there could even be more of it because the stick of load-shedding has incentivised people to invest in alternative energy solutions.”
Intellidex MD Peter Attard Montalto is above consensus on short-term growth, forecasting 1.3% for 2023 for this very reason — but with acknowledged downside risk. He says load-shedding adaptation, combined with lower inflation in the second half of the year, should complement renewables investments and diesel purchases to lift GDP.
He says the economic consensus has been too strongly influenced by the negative fourth-quarter GDP print from last year, which was skewed by the Transnet strike. In fact, he expects that GDP could spike to 2.1% next year, but only if there is enough investment in renewables to reduce load-shedding dramatically.
Over the longer term, however, he sees growth averaging at only 1.7% because, much as positive reforms are under way, he fears they will take years to shift South Africa’s growth dial sustainably above 2%.
Likewise, the IMF acknowledges the reforms South Africa has already undertaken but believes more are “urgently needed” to lift the country’s growth rate durably. These, it says, should focus on improving energy security, fostering private investment, promoting good governance and creating jobs.
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