Economic rebound in SA expected to take a turn for the worse

South Africa’s economic rebound is expected to lose momentum in 2022 from an average of 4.9% in 2021 to 2% in 2022 and 1.8% in 2023, while the dark cloud of unemployment will continue to take the shine off consumption spending.

According to Momentum Investments’ market and economic outlook for 2022, milder global growth should soften the demand for SA’s exports.

A moderate increase in rental inflation and reduced increases in medical aid tariffs are expected to drive an atypical response in local inflation, with headline inflation expected to average 4.5% in 2021, 4.6% this year and 4.3% in 2023.

Well-behaved inflation, anchored inflation expectations, and a pedestrian growth outlook opens the way for a moderate interest rate hiking cycle.

According to Herman van Papendorp, head of investment research and asset allocation, and Sanisha Packirisamy, economist at Momentum Investments, they expect the Reserve Bank to increase interest rates by 150 basis points over the next two years.

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SA faces these financial risks

They also point out that restraining expenditures, defunct municipalities, and increased allocations to state-owned enterprises that are financially and operationally ill remain key risks to South Africa’s fiscal consolidation path.

With milder global growth shaped by less accommodative fiscal and monetary policy, they expect demand for the country’s exports to soften.

“Moreover, even as a rebound in wages spurred household spending in 2021 faster than anticipated, lingering unemployment will affect consumption spending.”

Van Papendorp and Packirisamy expect that it is unlikely that lukewarm credit growth and more interest rate increases will be a major contributor to household spending in 2022. They say a lower level of restrictions during the course of the year will possibly have a smaller positive effect on growth outcomes.

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Reforms expected to boost economic rebound

A number of growth-enhancing political and economic reforms were introduced over the past two years.

Van Papendorp and Packirisamy expect the raised cap for electricity self-generation to unleash additional projects in the mining and minerals sector in particular.

They believe new project announcements in relation to Bid Window 5 of the renewable energy independent power producer programme and secured concessional climate financing have been positive announcements in the energy space, while the prospect of private sector participation to scale up capacity at the ports and reduce logistic costs are likely to increase efficiencies and competitiveness in the logistics sector.

However, despite these and other reforms in the areas of investment attractiveness and governance, they point out that a number of underlying measures in the World Bank’s Worldwide Governance Indicator for SA have yet to show a marked improvement, while government effectiveness and rule of law have shown a deterioration relative to a decade ago.

Although rating agencies have noted efforts to shore up institutional credibility, this pillar will remain under scrutiny in future reviews, with a weaker medium-term growth and fiscal picture will further weigh down the rating outlook in the medium term, they say.

Van Papendorp also point out that although finance minister Enoch Godongwana’s maiden budget broadly pacified financial markets, primarily thanks to an outsized revenue outcome from a commodity price boon, the size of South Africa’s gross debt burden is still large at R3.9 trillion.

The two largest risks to the short- to medium- term expenditure profile are the civil servant wage bill and the undeniable need to address high levels of poverty. Packirisamy say time is running out for government and labour unions to reach a wage agreement for the next fiscal period.

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Addressing economic hardship

They also say with the Social Relief of Distress grant set to expire at the end of March and nearly a third of the country living below the food poverty line, government needs to urgently address economic hardship for a large portion of the population.

“This is challenging in the context of SA already spending a high percentage of its wallet on social expenditure (3.3% of GDP relative to 2.1% in Argentina, 1.7% in Mexico, 1.5% in India or 1.4% in Brazil).”

According to JP Morgan, bringing the population up to the food poverty line of R624 per month will cost the fiscus an additional R30 billion every year, while raising living standards to the lower-bound poverty line of R890 per month to include some non-food necessities will require R60 billion every year.

“While officials at Treasury have highlighted the need to cover these households in a deficit neutral manner, the decision was deferred to the February 2022 national budget. An expert team on the basic income support panel has recommended a phased-in approach, with the country’s fiscal situation in mind,” Van Papendorp says.