Despite the suspenison of load-shedding since early April, South Africa's economy did not benefit. Photographer: Waldo Swiegers/Bloomberg via Getty Images
Last October, the International Monetary Fund warned in its World Economic Outlook that the worst is yet to come and that, for many people, 2023 will feel like a recession.
Shaping this rather dire outlook was a number of global headwinds, which stayed with us for much of 2022: Russia’s war on Ukraine, volatile energy prices, sky-high inflation, the ratcheting up of interest rates and China’s slowdown.
For a small, open economy like South Africa’s, these ructions in the global economy were bound to take their toll. And although a commodity boom ended up being a boon for the country’s mining companies — and for the public purse — the pinch on consumers was a threat to growth.
As we look ahead into 2023, a number of forces are set to shape South Africa’s economy, the biggest being the country’s energy predicament. Then there is the cost of living crisis, which in many ways defined 2022 and could continue to temper economic growth.
Load-shedding and arresting Eskom’s decline
A priority for the government will be bringing stability to Eskom. This is as the country continues to reel from load-shedding, which has weighed on the country’s economy for 15 years.
In its November monetary policy committee (MPC) statement, the South African Reserve Bank flagged the energy crisis as a major risk to the country’s economic growth in 2023, estimating that more severe rolling blackouts could shave 0.6 percentage points from GDP.
The Reserve Bank’s quarterly bulletin, published last month, pointed out that load-shedding has become more frequent in recent years, increasing from 9.7% of the
time (an average of three calendar days a month) in 2015 to 33.4% of the time (an average of 10.4 calendar days a month) in 2022 until the end of October.
During the third quarter of 2022, load-shedding reached an all-time high of 1 054 hours, or 47.7% of the time (an average of 14.8 calendar days a month).
In this same period, South Africa’s GDP surprised on the upside, expanding by 1.6% and putting the economy on a better footing than it was before the onset of the Covid-19 pandemic. But analysts warned against reading too much into this growth, citing the persisting energy crisis as a reason to remain sceptical.
Indeed, according to the Reserve Bank’s analysis, the severe load-shedding in the third quarter probably lowered quarterly real GDP growth by 2.1 percentage points.
Eskom’s drag on the economy has prompted the government to step in by committing to take over a large portion of the state-owned utility’s R400 billion debt.
Analysts will be watching Finance Minister Enoch Godongwana‘s budget speech, usually delivered in February, for more details relating to the debt takeover programme and the exact quantum the government is prepared to assume.
The announcement will also be an important factor in the decisions of ratings agencies, which have held off adjusting the country’s credit rating amid uncertainty over the country’s fiscal picture.
Moody’s changed Eskom’s outlook from negative to positive following the debt takeover announcement, noting that the intervention will improve the utility’s balance sheet.
“Nevertheless,” the ratings agency added, “details are lacking as to the exact scope of the transaction and there are risks to execution, given Eskom’s complex capital structure.”
Before the treasury can pin down an exact number for the takeover, the National Energy Regulator of South Africa will have to make its final decision on Eskom’s tariffs for 2023-2024 and 2024-2025, now expected to be delivered next Thursday.
Godongwana recently said he was more worried about delays in the regulator’s decision than about André de Ruyter’s resignation as Eskom’s chief executive.
Will the cost of living crisis continue?
Apart from load-shedding, the cost of living crisis has also emerged as a major drag on the country’s economy. According to Statistics South Africa, the decline in household consumption expenditure was the biggest negative contributor to the country’s GDP in the third quarter of 2023.
Because household consumption expenditure contributes around 60% to GDP, the path of the cost of living crisis will be a major indicator of the economy’s health in 2023.
Oil prices, which drove inflation in 2022, have now come down, dropping to levels last seen before Russia’s war on Ukraine.
The decline in oil prices has come off the back of a weakening demand outlook amid growing fears of recession in the United States. This is as the US Federal Reserve has ushered in tighter monetary conditions in its effort to bring inflation to heel. The costs of borrowing in the US have hit their highest levels since 2007.
Given the volatility of energy markets, it is difficult to predict where the oil price might land in 2023. According to the World Bank’s forecast, oil prices could average $92 a barrel in 2023, down from $100 in 2022.
On the domestic front, lower global oil prices have caused the cost of petrol and diesel to fall sharply this week, which is good news for consumers feeling the pinch of inflation.
But current forecasts don’t see inflation coming down dramatically any time soon, especially considering that core inflation — which excludes fuel and food prices — also rose notably in 2022. One key factor driving core inflation, and which the MPC has flagged, is administered prices, which have risen 10.9% year-on-year.
The Reserve Bank expects headline inflation to sustainably revert to the midpoint of its 3% to 6% target range by around the second quarter of 2024. This is important as the bank aims to keep inflation anchored at the midpoint, rather than simply bringing it back within the target band.
For this reason, many still expect the MPC to remain hawkish during deliberations at its first meeting of 2023 later this month. At 7%, South Africa’s repo rate, which affects the cost of borrowing, already exceeds its pre-pandemic level of 6.25%.
Higher borrowing costs, as well as the decline in real disposable incomes, have weighed on households. Meanwhile, consumer confidence has remained in depressed territory, suggesting that growth in household consumption expenditure is likely to be modest in the medium term.
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