The National Treasury's basic forecast announced on February 22, 2023, predicted that the growth rate in 2023 would moderately slow to 0.9%.8 The South African Reserve Bank (SARB)'s outlook for the end of January 2023 was not optimistic at 0.3%. This figure is based on the key assumption that there will be more than 250 days of power outages and longer power outages in 2023, which SARB says will likely reduce GDP growth this year by up to 2 percentage points. thinking.9 As of the end of March, the bank had slightly revised down its growth forecast to 0.2%.Ten
The International Monetary Fund (IMF) lowered its 2023 forecast to just 0.1% on March 23, 2023, from 1.2% in its latest information in January.11 Due to worsening power shortages and an uncertain global environment.
Furthermore, taking into account the decline in net exports due to logistics bottlenecks, the easing of commodity prices, and the increase in electricity-related imports, the current account deficit will expand from -0.4% of GDP in 2022 to -1.8% of GDP in 2023. It is predicted that 2% in 2024.12 In a possible upside scenario, capital investment would be “front-loaded” and the resolution of the energy crisis would be expedited by creating a stable supply of electricity (most of the capital goods would be needed, so the current account deficit would widen further). become). According to the National Treasury, growth in the medium term will still be below 2% per year on average.13
Indeed, with economic confidence already low and financial conditions strained, banks in major developed countries are cutting back on lending due to headwinds from the collapses of three mid-sized U.S. banks and Zurich-based Credit Suisse. While there,14 Economic activity in South Africa's major trading partners may further slow down. This, combined with weak commodity prices, will give further impetus to a 'no growth' scenario for South Africa's economy in 2023.
Moreover, employment remains below pre-pandemic levels, and rising poverty and inequality are a cause for concern in terms of social stability for a country heading into an election year (national elections will be held in 2024). (scheduled for the quarter).
Consumers remain under financial strain and businesses are exposed to increased costs
Rising global food and fuel prices have pushed inflation above the SARB's inflation target range of 3-6%. For the first time since the headline inflation rate reached a 13-year high of 7.8% in July 2022, the headline inflation rate in February edged up slightly from 6.9% year-on-year in January 2023 to 7% in the same month. recorded an increase. This reflects higher food prices (up 13.6%). % over the past year) and price pressure from load shedding.15
South African consumers are under significant financial strain. At the end of February 2023, the Deloitte South Africa Consumer Tracker revealed that 41% of consumers felt their financial situation had worsened in the past year.16 And they are worried about their financial situation. Data shows that given rising grocery prices, consumers are making bigger trade-offs (such as buying lower-priced meat, buying more store brands and cheaper ingredients). Not only am I doing better, but I'm also being more frugal (mostly in the following ways). Reduce food waste, buy only the essentials, and don't buy more than you need). The FNB/BER Consumer Confidence Index (CCI) declined to -23 points in Q1 2023 (from -8 points in Q4 2022). This is the third lowest CCI on record since 1994, and could have an impact, for example, on a decline in durable goods sales this year.17
Load shedding is expected to last until at least the second half of 2023, as retailers and consumer goods companies spend more on power backup, increasing business costs and, in turn, putting further pressure on consumers. likely to face further price increases. input cost. Similarly, many high-income households have already started investing in backup and renewable power solutions, or may be considering these options in light of their recently announced 2024 tax rebates. are expensive and require certain trade-offs to purchase.18
The SARB has been relentless in its efforts to combat inflation, increasing rates for the ninth time in a row at the end of March 2023. Markets and economists had expected a 25 basis points (bps) rate hike, but the central bank judged the risk to inflation to be low. This year, not only food price inflation but also core goods inflation is expected to be higher than previously expected and is on the upswing. There are also concerns that tightening lending conditions globally are raising the risk profile of economies such as South Africa, which need foreign capital to finance rising current account deficits.19
This will put further pressure on middle-class consumers, slowing consumer demand, and tightening lending conditions, which will dampen business investment decisions, employment and, ultimately, growth prospects. Together with business continuity issues (most notably burden relief), this is likely to impact private sector margins and profitability in the coming months and could have fiscal spillovers, for example through corporate tax cuts. .
Fiscal restructuring continues, but debt worsens due to intervention in state-run power companies
On a positive note, South Africa's finance minister announced in the budget read out in February that the country would continue on a path to fiscal consolidation. This will require reducing the budget deficit while containing growth in consumer spending, without raising taxes, cutting infrastructure spending, or affecting the social wage. In fact, the latter remains a spending priority, accounting for 60% of the country's non-interest spending over the next three years.20
Taking into account that tax collections exceeded last year's budget forecast (mainly due to more efficient and effective tax administration and collection), the consolidated fiscal deficit will be 4.2% of GDP in 2022-23 and 2023- It is expected to decline to 4% in 2024 and then to 3.2%. From 2025 to 2026. This is despite consolidated spending increasing by an average of 4.5% per year over the next three years. A surplus in the primary balance is also expected from 2023 to 2024.
However, due to the impact of the government's decision to provide debt relief to state-run electricity company Eskom, the country's total debt-to-GDP ratio will worsen, given the need for government borrowing and thus increased public debt. The debt relief agreement will see the government assume more than 50% of Eskom's debt over three years, freeing up resources for the utility to separate and invest in new generation capacity and maintenance activities, but subject to strict conditions. It will be based on Debt levels were expected to stabilize as early as 2022-23 following last year's windfall, but they are expected to stabilize only three years later, reaching 73.6% of GDP in 2025-26. There is.twenty one As a result, the country has one of the highest public debt-to-GDP ratios among emerging countries.twenty two
Debt costs will also increase by shouldering the debt of struggling public utilities. Debt service remains one of the fastest growing expenditure items in national budgets in the medium term and continues to weigh on other expenditures.twenty three
