South African economy at bottom line as outlook improves but political, energy risks remain

South Africa’s long-awaited economic reforms have begun to improve the country’s prospects, but long-standing problems of political instability and a failing power system still pose significant risks.

The Economic Reconstruction and Recovery Plan has been a key tenet of President Cyril Ramaphosa’s agenda since he succeeded Jacob Zuma as the country’s leader in 2018. However, divisions are deep within the Nation. The ruling African National Congress (ANC) and his cabinet have slowed progress.

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

And – at least some – seem to be working. S&P Global Ratings earlier this month confirmed the positive outlook for the country, saying that government measures to stimulate private-sector activity could boost growth and that measures taken by the government to stimulate private-sector activity could boost growth. This has the potential to ease economic pressures.

“There is some hope for public finances in South Africa, mainly due to increased government revenues due to higher exports of goods, and also due to the progress made in reducing debt and debt distress, while opening up the public deficit,” Aleix Montana, Africa analyst at risk consultancy Verisk Maplecroft, told CNBC last week.

However, political weaknesses and persistent problems at a state-owned company continue to pose current economic risks.

Montana said Ramaphosa faces “a storm of inflation, power cuts and allegations of corruption that will continue to tarnish South Africa’s image and pose a risk to investments in the country”.

A report on the corruption scandal surrounding Ramaphosa will be considered by Parliament on December 6, just 10 days before the party congress of his ruling ANC (African Congress).

energy woes

Although Ramaphosa is expected to secure a second five-year term, Montana said he will have to bolster his credibility for economic reforms and fight corruption to keep pushing the program forward. its agenda. The economy is also at risk of ongoing disruption at state-owned companies, such as the electric utility Eskom.

South Africans have faced intermittent power outages as Eskom – which has long been a thorn in the side of the country’s economy – faces shortfalls in generating capacity due to equipment failures and lack of diesel engine.

The company has warned that power outages, known as “offloading,” will continue over the next six to 12 months, and recently said it was running out of money to buy the diesel engines needed to run the plants. Auxiliary power is deployed at intervals. peak consumption or emergencies.

Montana says that to ensure sustainable economic growth, the South African government will need to prioritize energy sustainability.

“Energy will need financial support from international players, but they also need to make sure it doesn’t have a negative impact on South African society,” he said.

“Apart from the financial challenges, a lot of South African nationals are working in Eskom or in the fossil fuel sector, so the government will need to ensure that in their planning they minimize the impact.” potential of the transition from a fossil fuel-based economy to the deployment of renewable energy to maintain electrical stability.”

Asked about the issue during a recent state visit to the UK, Ramaphosa told CNBC’s Arabile Gumede that the problems at Eskom began long before 2014, when former President Jacob Zuma added It was his responsibility to solve the country’s energy problems.

“When we were producing electricity, the power plants kept breaking down – many of them old – but we are struggling with a new boat, the management is ready to solve the problem,” said Ramaphosa. this”.

“So Eskom’s problems are seeds that were planted years ago, not 2014, and because we’re dealing with huge, complex and complex machines, no it can’t be fixed in a day or two, it can never be. complicated process.”

He added that the government is working to reduce offload requirements and to “make sure the money is always there,” noting that Eskom “was the best utility in the world.”

“Am I confident that we will solve these problems? Yes, I do. I am very confident that we will solve them,” he said.

“But I think it’s important to appreciate our roots, and obviously, it’s very easy to blame the president, blame the government, but these problems have happened. back in the past. .”

‘Tame the monster’ of inflation

Along with domestic problems 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 the Reserve Bank of South Africa’s expectations of easing price pressures. This prompted the bank’s Monetary Policy Committee to raise rates sharply by 75 basis points last week, bringing the benchmark repo rate to 7%.

This marked the seventh meeting in a row where monetary policy was tightened, and central bank Governor Lesetja Kganyago said in a press conference that they must “tame the inflationary monster.”

With prices rising much faster than the central bank’s 3-6% target, Kganyago noted that the SARB needs to see clear evidence that inflation has not only peaked, but has begun to steadily decline towards the midpoint. of scope.

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

“We think inflation is unlikely to return to its target range (let alone average) in the coming months, making it difficult to see inflation return to its target range in the coming months,” said Virág Fórizs, emerging markets economist at Capital Economics. Policymakers continue to tighten the regime until 2023.”

She believes that food inflation continues to rise, offsetting some of the effects of reduced fuel price pressures, while core inflation is likely to remain high. Capital Economics forecasts inflation will hover around 7.5% annually through early 2023, before falling sharply around mid-year.

Fórizs said the weakness of the economy is unlikely to deter further rate hikes, with growth concerns playing a second role after worries about inflation. South Africa’s GDP fell 0.7 percent in the second quarter.

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

Three MPC members voted to raise rates by 75 basis points last week, while two members voted in favor of 50 basis points. It marked a softening in the approach of some who voted for a 100 basis point increase at the previous meeting.

“Overall, we have outlined a plan to increase the repo rate by 100 bp, to 8.00%, by the second quarter of 2023,” said Fórizs.