Estimated reading time: 5 minutes
Driven by constant political conflict, global events and a notorious crime rate globally—South Africa feels as though it is in an economic freefall.
Corruption has created a strange new culture throughout the SA economy where Billions are stolen without a single person charged. SOEs continue to decay, pushing the goal of a “lucrative for all country” further and further away. Jointly, foreign countries are hesitant to invest in SA due to unethical policies and the said never-ending political turmoil.
This all leaves the average person surviving in a country that, simply put, is difficult to see down the road. When asked, most people are unsure of South Africa’s future and its livability, and rightfully so.
Thus, ensuring our Newcastillian community obtains the correct information from an exceptionally well-versed professional on the subject, Annabel Bishop, the Chief Economist for Investec Ltd, chats with us about what you can expect over the next year in sunny South Africa.
When looking at the average cost of living, such as rent, food, fuel, and the strength of the South African Rand, for the upcoming year, Bishop highlights that South Africans best prepare themselves for a bumpy ride.
She explains, “Inflation pressures in SA have been on an upwards trend, pushed up by some of the same pressures experienced globally, particularly higher fuel and food prices, with domestic food prices influenced by prevailing global food costs.”
On the producer side, Bishop points out that SA saw Producer Price Index (PPI) inflation climb to 10.8% y/y in December 2021, up substantially from 3.0% y/y in December 2020.
High commodity prices, base effects in some subsectors and high transport and equipment costs all drive up supply cost pressure.
“South Africa has also seen high meat price inflation, and animal products generally drive-up food price inflation, with live agricultural animals’ prices 18% higher y/y (year-over-year) in December, and meat prices up 9.6% y/y, both in the PPI. This placed upwards pressure on meat prices in the CPI (Consumer Price Index) in January, while globally food prices lifted slightly in January m/m (month-over-month) by 1.2%, after December’s more significant 6.4% m/m lift.”
Then, of course, Bishop stresses that higher oil prices from an escalation in the Russian/Ukraine conflict will push up inflation substantially.
“South Africa is expected to see CPI inflation average over 5.0% y/y this year.”
She further elaborates that the rand will remain volatile on the Russian/Ukraine war, at high risk of further substantial moves, but has a long-term trend of weakness.
Additionally, Bishop explains, “The domestic currency will also be weakened by SA’s inflation rates remaining well above those of its key trading partners, the EU, US, UK and China on a long-term basis, despite short-term dislocation of this relationship in some areas.”
When looking at the current trajectory of South Africa, Bishop believes there is some positivity for the economy in the next year.
“2022 will see the economic growth of around 1.8% and its forecasts to remain above 2.0% y/y over the 2023 to 2026 period, and reach 2.5% y/y by 2024 and close to 3.0% y/y by 2026.”
However, from her perspective, the economy faces challenges that need to be overcome.
“SA still takes many of the risks and weaknesses of 2021 into 2022, particularly the risk of load shedding damaging economic growth, and two units are due to go offline this year at Koeberg for maintenance, while the economy is expected to grow by around 2.0% y/y for 2022, and 2023 (and potentially above 2.0% y/y for 2024 to 2026), which will further strain the system if additional units of production breakdown or go offline.”
As a result, Bishop stresses that insufficient electricity supply for a faster-growing economy remains a key concern. She further says that private sector power producers will take many years before stabilising the grid. This means that our distorted relationship with dilapidated Eskom is far from over.
Furthermore, she stresses that SA is a key commodity exporter (chiefly of metals, minerals and agricultural products). But the risks of severely escalated Russian/Ukraine hostilities impact commodity prices as markets worry about global growth.
“SA also continues to see insufficient improvement in the enabling environment for businesses, which the World Bank terms “the ease of doing business”. SA has a particularly onerous state imposed regulatory burden on the private sector, with a plethora of red tape, as well as relatively low civil servant productivity,” she says.
Moreover, substantial interventions to support the business environment in order to quicken economic growth are lacking. This, coupled with any significant additional social welfare transfers in SA, will place severe pressure on government finances, further placing SA at high risk of rating downgrades.
As the country has to overcome a series of issues to enhance the economy, Bishop points out that the average South African will be significantly impacted before things start looking better.
“After close to two years of the pandemic, households in South Africa overall have insufficient savings and excessive debt (Momentum Consumer Financial Vulnerability Index (CFVI) survey), but a marked improvement in Q4.21 incomes has compensated for low savings.”
Bishop notes that removing policy support measures will likely see some household savings run down on robust household consumption. But it is also unlikely to be eradicated, with transfers from government to household savings in advanced economies potentially more permanent.
“Overall, South Africa’s household finances remain vulnerable, which will persist over 2022, as little structural change has occurred in the economy to substantially ratchet up economic activity and so employment, and risks persisting longer-term. Increased household indebtedness, particularly mid to low end, will also limit growth of HCE (Household Consumption Expenditure).”
According to Bishop, the temporary social distress relief grant was recently extended, but it is insufficient to wholly counter the effects of job loss from the 2020s excessively harsh lockdown restrictions. “Government is therefore looking to institute a basic income support grant for the unemployed.”
Over and above all of the previously mentioned, unfortunately, the grants appear to create a “no work” culture, as noted by factory owners in Newcastle’s industrial area. Click here to read the full story.
What are your thoughts on South Africa’s economy and Chief Economist Annabel Bishop‘s forecasts?
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