Euromonitor International’s South Africa Economy, Finance and Trade Country Briefing, focuses on Sub-Saharan Africa’s most industrialised economy that is currently experiencing economic and political mayhem. The nation’s sovereign status was downgraded to ‘junk’ by the credit rating agencies Standard & Poor’s (S&P) and Fitch in April 2017, which could lead to heightened capital outflows, reduced investor confidence, job cuts and depreciation of the rand. In addition, risks resulting from a potential China hard landing could potentially slowdown South Africa’s economic growth. Euromonitor International forecasts South Africa’s real GDP to grow at a sluggish pace of 0.9% in 2017.
Escalating inflation and high current account deficit are some of the other key concerns
- Economic growth slowed over 2011-2016, owing to lower commodity prices for its large mining sector. This has also made it vulnerable to economic malaise in China, a country which is a major consumer of South Africa’s mining products. Consequently, annual real GDP growth slowed to 1.3% in 2015, which was also due to a severe drought, but was supported by consumer spending, given a lower number of strikes and greater public sector wage rises. It could moderate further to 0.2% in 2016;
- The biggest risk to South Africa’s economic outlook continues to be a slowdown in the Chinese economy. Furthermore, the large value of South African financial instruments held by foreign entities also makes it vulnerable to volatility in the global financial system;
- The South African Reserve Bank (SARB), the country’s central bank, raised the benchmark interest rate from 5.75% to 6.25% in 2015 and has raised it again four times to 7.0% in 2016, owing to escalating inflation that has been exacerbated by higher food and energy prices (caused by the drought in 2015);
- The current account deficit reduced from a period high in 2013 to 4.3% of GDP in 2015, owing to the positive impact of lower imports. However, by major emerging market norms, the current account deficit is high, which is made more problematic by the fact that it is financed by liquid foreign investment inflows, such as stocks and bonds, which can be quickly withdrawn;
- Public debt equated to 49.8% of GDP in 2015, an increase since 2010, owing to the need to service the budget deficit and the high proportion of debt held by SOEs. Going forward, there is a risk that public debt could rise further, should the government need to support indebted SOEs.
Downgrade to ‘junk’ status will increase borrowing cost and put immense pressure on the rand
South Africa is struggling to cope with the negative outcome of the ongoing political turmoil. President Zuma’s last cabinet reshuffling move of replacing Pravin Gordhan with Malusi Gigaba received major criticism leading to the status downgrade. This has caused unprecedented panic amongst foreign investors, who are already withdrawing or seeking to pull out their investments from the South African economy. This in turn, will lead to a rise in borrowing costs and weakening of the rand; thereby adversely impacting public finances and limiting spending on infrastructure projects. All this would put further downward pressure on an already decelerating real GDP growth rate; thereby worsening the country’s economic situation that could even prompt a recession.