Will South Africa find a way out of its economic rut?

Growth laggard

Since 2010, South Africa’s real GDP has expanded by a mere 1.2% year on year on average, one of the worst performances on the continent. When considering that population growth is running at around 1.5% per annum, this means that GDP per capita has actually fallen over the last decade. A host of factors explain this abysmal economic track record, such as an unreliable electricity supply, corruption, high crime rates, sky-high inequality, a lack of competition in key markets and the poor quality of education. In recent months, a sinking rand and rate hikes by the South African Reserve Bank have added insult to injury.

Failing to keep the lights on

Of all the issues that South Africa is currently facing, power shortages are arguably the most pressing. 2022 saw the worst outages on record, with homes and businesses left without electricity for up to 10 hours per day. In February this year, President Ramaphosa declared a state of disaster to attempt to deal with the crisis. In the same month the government said it would take on over half the debt of Eskom, the beleaguered state power provider, and in March a minister of electricity was appointed. However, any improvement in power supply is likely to be gradual, and enforced power cuts will continue for the foreseeable future.

Creaking under the fiscal burden

Tepid growth in national output coupled with a bloated public sector means that South Africa has run a persistent fiscal deficit of over 4% of GDP in recent years. Our panelists see this trend continuing out to 2027, with elevated social spending and public wage demands and expected declines in prices for key exports frustrating efforts to close the budget shortfall. As a result, the public-debt-to-GDP ratio is forecast to continue rising over the forecast horizon. South Africa’s bonds are consequently rated deep in junk territory by the major credit agencies.

No quick fix

Following an expected stagnation in 2023, the Consensus among our analysts is for South Africa’s GDP growth to improve marginally in subsequent years, likely thanks to some success at structural reforms and limiting outages in the power sector. However, growth will still be depressed by regional standards, and the unemployment rate will remain among the world’s highest at over 30%. South Africa is an economy with huge potential—it has vast natural resources and a young, fast-growing population. But that potential will remain unrealized for the foreseeable future.

Insights from Our Analyst Network

On the fiscal position, the EIU said:
“Revenue gains are threatened by a projected decline in non-commodity prices, in line with a slowing global economy, and by weak domestic growth. Other notable fiscal risks relate to spending, including a fightback by public-sector labour unions against wage restraint, an unsustainable rise in welfare payments and the heavy debt loads of parastatal enterprises (especially Eskom). To relieve Eskom’s unsustainable debt burden, the government will provide loan financing of ZAR 254 billion (USD 13.8 billion) over three years, with strict conditions attached.”

On inequality, the World Bank said:
“South Africa remains a dual economy with one of the highest and most persistent inequality rates in the world, with a consumption expenditure Gini coefficient of 0.67 in 2018. High inequality is perpetuated by a legacy of exclusion and the nature of economic growth, which is not pro-poor and does not generate sufficient jobs. Inequality in wealth is even higher, and intergenerational mobility is low, meaning inequalities are passed down from generation to generation with little change over time.”