REPORTS

Market Brief

South Africa’s economy starts 2021 on a positive note, but the looming third wave of Covid-19 infections present a downside risk to growth

Real annualized quarterly GDP went up by 4.6% in the first quarter of 2021. This was following annualized expansions of 67.3% q/q and 4.6% q/q during the third and fourth quarter of 2020, respectively. Today’s GDP print confirms that South Africa’s economy is indeed recovering from its record slump in H1-2020, even though it is still to recover to pre-pandemic growth levels. Today’s GDP print shows that the second wave of Covid-19 infections that led to the country being placed at tighter (adjusted level 3) restrictions at the beginning of the year did not severely dampen South Africa’s economy.

South Africa records its fifth consecutive current account surplus in Q3

Current account data released by the South African Reserve Bank (SARB) today indicates that, in the third quarter of 2021, South Africa’s current account registered its fifth consecutive surplus since the third quarter of 2020. The surplus however narrowed from R311 billion in the second quarter of 2021 to R226 billion in the third quarter. Relative to GDP, the current account surplus narrowed from 5.1% in the second quarter to 3.6% in the third quarter.

 Quarterly Report

South Africa’s economy amid unrests, Cabinet changes and a mining sector boon

South Africa’s growth: South Africa’s economy that is once again being adversely impacted by another round of more stringent lockdowns on account of the third wave of Covid-19 infections, encountered another setback in July. This was in the form of the civil unrest that took place at the beginning of July that was sparked by the arrest of former President, Jacob Zuma. Still, we expect real GDP to increase by 4.1% in 2021.

Poverty and unemployment and inequality: Poverty and income inequality are rampant in South Africa, while high unemployment, especially youth unemployment, has been a permanent feature of the economy. The unemployment rate had already crossed 30% pre-pandemic and the Covid-19 economic crisis has pushed it even higher.

Investment: Gross fixed capital formation has been shown to be an important driver of economic growth in South Africa. Despite this, data shows that South Africa’s investment has been lackluster since the great recession, with slower pace in investment recorded for all three South African institutional sectors. Nonetheless, a number of developments in the space warrant some optimism as the investment projects have a potential to meaningfully boost South Africa’s growth.

Mining: The sector, which is benefiting from the surge in commodity prices, was the fastest growing in the first quarter. With commodity prices, especially South Africa’s export commodity prices, remaining elevated, mining is expected to remain robust. Real mining output was also higher than that of Q1 2020, i.e.: pre-pandemic.

Inflation: Though domestic demand remains muted, base effects from 2020’s abnormally low inflation rates have pushed annual inflation rates since April 2021 above 4%. As such, the headline inflation rate has risen above the midpoint of the Reserve Bank’s inflation targeting range.

Fiscus: The windfall in revenue from mining sector income tax has allowed government to assist the economy following the events of the unrest as well as the economic fallout from the recent economic lockdowns without incurring more debt. Moreover, despite the extra expenditure items, we expect the budget deficit to be slightly lower than the one forecasted in Budget 2021.

Cabinet Reshuffle: President Ramaphosa reshuffled his Cabinet as he had alluded to for some time since the unrest. He announced the reorganizing of his Cabinet on the evening of Aug. 5th, with some of the more significant changes affecting national security portfolios, and Ministries of Finance and Health.

Political Economy Note

ANC Leadership and Election Battles

What does South Africa’s future hold? Can it move away from corruption and political infighting and onto a path of economic growth and stability? At a 26 January 2022 roundtable with top political analysts and economists, the Institute for Security Studies (ISS) tested its latest country forecasts to the 2024 and 2029 national election results.

Special Report

South African reserves and their role as the country’s financial buffer

Although the South African Reserve Bank has indicated during past bouts of the rand’s depreciation that it would not intervene by using the country’s reserves, South Africa’s reserves, which include gold and other foreign reserves, are an important liquidity buffer that can be used against foreign exchange and external funding pressures. According to the Bank for International Settlements (BIS), due to South Africa’s floating exchange regime, the country’s accumulation of foreign exchange reserves has not been primarily driven by the need to create capacity to intervene in the foreign exchange market. The Reserve Bank’s holding of reserves is, therefore, underpinned by precautionary considerations. South Africa’s foreign reserves currency composition is hence guided by relevant external liquidity considerations including the currency composition of the country’s exports as well as foreign currency denomination of government debt. Additionally, as South Africa has a relatively large and developed financial sector, its holding of foreign exchange reserves can also be utilised to overcome potential private sector foreign exchange shortages.