Economic and political cross currents to hit South Africa in 2023

Economic and political cross currents are waiting for the South African economy in 2023 according to economists’ crystal balls. Consumers must get ready for another tough year, with all the challenges that they faced in 2022.

“It is hard to recall a time when there were as many economic and political ‘cross currents’ as those waiting for South Africa as it enters 2023,” says professor Raymond Parsons, economist at the North-West University (NWU).

He says South Africa’s economic prospects in 2023 will be broadly shaped by global developments, Eskom and policy implementation commitments by government. “The interaction between these factors will determine the risks and opportunities that exist over the next 12 months in a changing socio-economic environment in South Africa and elsewhere.”

The reality is that business and consumers will face another tough year in the meantime, with strong inflation, rising interest rates, high unemployment, load shedding and low growth, all of which make for a challenging economic period ahead, Parsons says.

“However, the much-better-than-expected gross domestic product (GDP) growth figures for the third quarter of 2022 nevertheless gave South Africa a stronger ‘cushion’ of forecasts to absorb some of the negative trends where 2022 ended. And it is likely that the rate of inflation, although still unacceptably high, will ease in 2023, particularly if fuel costs decline further.”

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Tepid exports, consumer spending and investment

He warns that the expected tepid performance of the three main drivers of South Africa’s economic activity in 2023 – exports, consumer spending and investment – suggest that economic growth is likely to be only about 1.4%, which is below the rate of population growth.

“There is no more critical issue for future South African prosperity than that real inclusive economic growth should be accelerated.

“Growth has been too low for too long, as countless surveys and official policy statements have emphasised, Parsons points out. “Therefore, although the economy is presently struggling to maintain momentum in a combined cycle of elevated global and domestic economic uncertainty, there are remedies that can strengthen our economic resilience and unlock more growth support in 2023.”

He says if President Cyril Ramaphosa soon converts his stronger political mandate into rapid implementation of pro-growth policies and projects, the country’s prospects for job-rich growth will improve in 2023.

“And Eskom in particular must be fixed urgently. No economy can grow and create jobs if chronic energy insecurity and widespread disruption persists. Therefore, the ball is mainly in South Africa’s court in 2023 to mobilise the policies and projects demonstrating real progress in key economic reforms that can make a positive difference to its economic performance.”

Parsons also emphasises that boosting investor confidence remains essential. “The policy test in 2023 will be the extent to which South Africa can smartly minimise the global ‘headwinds’ and maximise the domestic ‘tailwinds’, especially through deeper and wider collaboration with the private sector. This will help to reduce prevailing policy uncertainty and ignite confidence.”

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Political uncertainty will also curtail growth

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, also looked into his crystal ball and says lower growth in South Africa’s main trading partners will reduce demand for the country’s exports, while slow reform in energy and logistics, as well as mounting consumer headwinds, will cap growth in domestic demand.

“Moreover, political uncertainty has leapt on the possibility of Ramaphosa leaving his position. Question marks over the country’s political outlook cast a dark shadow over investment and growth prospects.”

After a year when interest rates increased by leaps and bounds, the question everybody is asking is when interest rates will peak and when will the SA Reserve Bank (Sarb) cut the repo rate again.

Van Papendorp says the Sarb is likely to increase rates further in the first quarter of 2023 to stop the spread of broad-based inflation pressures. “However, the likelihood of an improved global risk backdrop towards the end of 2023 could see the Sarb reversing policy, but the risk is nevertheless biased towards a tighter stance if higher political uncertainty drives the local currency weaker for a sustained period, leading to an uncomfortable jump in inflation expectations.”

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Grey-listing and rating downgrades

There are also the risks associated with a grey-listing event or further rating downgrades and Van Papendorp says a potential grey-listing and a consequent exiting of a grey-listed status will depend on perceived action to address the Financial Action Task Force’s (FATF) concerns.

“Recent political events threaten to derail the progress on the fight against corruption and raise concerns over the pace of structural reform in areas of the economy that promote growth and fiscal sustainability. As such, we see downside risks to SA’s sovereign rating in the medium term.”

Van Papendorp adds that curtailing growth in the public service wage bill and finding a long-term financial solution for state-owned enterprises, which creates economic value, can stabilise government finances in the long run.

“Conviction in government’s willingness and ability to implement unambiguous policies quickly and efficiently can further jumpstart the economy and raise market confidence. The appetite to further the country’s structural reform agenda remains critical to growth, investment and socio-economic outcomes.”