Økonomiske studier
South Africa

South Africa

Population 54.9 million
GDP 5,726 US$
C
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2014 2015  2016 (f) 2017 (f)
GDP growth (%) 1.6 1.3 0.3 0.8
Inflation (yearly average) (%) 6.1 4.6 6.0 5.7
Budget balance (% GDP) -3.9 -3.8 -3.9 -4.1
Current account balance (% GDP) -5.3 -4.4 -4.1 -4.8
Public debt (% GDP) 47.1 50.1 51.4 52.5

 

(e) Estimate (f) Forecast

* fiscal year : April to May

STRENGTHS

  • Economic and political power Puissance
  • Rich in natural resources (gold, platinum, coal, chromium…)
  • Developed services sector (especially financial services)
  • Legal system provides protection for investors

WEAKNESSES

  • Poverty and inequality are sources of social risk (crime, demonstrations)
  • High unemployment (27%, 54% for those aged 15- 24) and shortage of skilled labour
  • Infrastructure shortcomings (transport, energy)
  • Dependence on volatile flows of foreign capital
RISK ASSESSMENT
Uncertainties over growth which is expected to remain weak in any event

South African growth is expected to remain very weakly positive in 2017. Agricultural activity, badly hit by drought in 2016, could benefit from more favourable weather conditions. Infrastructure projects could sustain construction and the industrial sector.

The brakes on growth and uncertainties over the country's economic development are still significant, however. Industrial production could continue to be impeded by the lack of competitiveness and persistent problems with electricity supply, despite the improvement observed since 2016, as well as low prices for mining products. In contrast, household consumption, traditional driver of the economy and boosted by a slight downturn in inflation, is expected to suffer from the historically high level of unemployment (27% in late 2016). The introduction of a national minimum wage, proposed by the government in late 2016, would help stimulate private demand; however, implementation, if it is indeed confirmed, will not be before the second half of 2017.

Rising oil prices are likely to fuel inflationary tensions, which could, however, be mitigated by food price moderation.

The rating agencies' decision to hold South Africa's status at "investment grade" at the end of 2016 could have a positive impact on household and investor confidence at the beginning of 2017. But the risk of a downgrading in 2017 has not gone away and this threat could dissuade businesses from investing. A downgrade to "speculative" would trigger the depreciation of the rand, fuelling inflationary pressures and dampen household consumption, while discouraging investment still further. Uncertainties over the development of the political situation are also weakening the country's growth prospects.

 

No room for manoeuvre in terms of budget and persistent current account deficit

The South African government needs to bring its budget deficit under control and stabilise its debt in order to avoid any further downgrade by the rating agencies. The challenge is sizeable, given the weakness of activity, which is putting pressure on tax receipts. Further tax rises are provided for in the April 2016/March 2017 budget. However, the weak economic growth could limit government income, while current spending (about 50% of the total) is likely to remain fairly stable and the government remains committed to the realisation of infrastructure projects. Furthermore, the burden of repaying the public debt is increasing because of higher interest rates on the domestic market, the main source of government finance. Support for some public-sector companies (Eskom, South Africa Airways) could also be a burden on the public finances.

The current account balance is expected to deteriorate in 2017. Exports, dominated by mining products (particularly gold and platinum), which account for almost a third of the total, are not expected increase much. Commodity prices, although more positively oriented than in recent years, are unlikely to increase greatly. Moreover, growth on South Africa's principal markets (China, EU), is expected to be moderate. The slight increase in the oil price and the increase, though modest, in consumption, are likely to push up imports and contribute to the deterioration of the balance of payments.

A large current account deficit, uncertainties over economic and political development and the prospect of the rise in US interest rates, is likely to maintain the downward pressure on the rand in 2017. Capital inflows are expected to remain very unstable and the exchange rate of the South African currency very volatile. The loss of “investment grade” could lead to a sizeable devaluation, especially as the central bank’s leeway for raising its key rate (7% since April 2016) is much reduced on account of the low growth rate.

The banking sector, well capitalised and little exposed to exchange rate risk, remains strong, with a low ratio of non-performing loans (around 3%). Credit risk could, nevertheless, increase in view of the impact of the economic slowdown on borrowers' creditworthiness.

 
Persistent political tensions and a degraded business climate

Despite the ANC’s comfortable victory in the May 2014 elections, the country’s political and social evolution is still plagued by uncertainties. Jacob Zuma’s authority is increasingly contested, especially after accusations of the misappropriation of public funds and collusion with the business community. In view of his lack of legitimacy and growing dissension in the ranks of the ANC, Jacob Zuma could be forced to resign from the presidency of his party, at the end of 2017 convention. The persistent failure to respond to the people’s expectations on unemployment, poverty and corruption remains a source of social instability. Student protests which erupted in late 2016 bear witness to widespread discontent.

South Africa’s performances are satisfactory according to the World Bank’s governance indicators, but are on a deteriorating trend with regard the rule of law (86th in 2015, i.e. ten places lower in a year). Crime levels and corruption are also handicapping the business environment. 

 

Last update: January 2017

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