South Africa’s economy at a pivotal point as the outlook improves, but political and energy risks remain | Bot To News

LONDON – South African President Cyril Ramaphosa speaks at a press conference in central London on November 24, 2022

JUSTIN TALLIS/AFP via Getty Images

South Africa’s long-awaited economic reforms have begun to improve the country’s outlook, but the age-old problems of political uncertainty and a failing power system still pose major risks.

The economic recovery and recovery plan has been a key tenet of President Cyril Ramaphosa’s agenda since succeeding Jacob Zuma as head of state in 2018. But deep divisions within the ruling African National Congress (ANC) and his own cabinet have made progress slow.

The reform package – focused on energy security, infrastructure development, food security, job creation and a green transition – is designed to create a “sustainable, resilient and inclusive economy”, the government says.

And at least some of them seem to be working. Credit rating agency S&P Global Ratings reaffirmed its positive outlook for the country earlier this month, saying government measures to boost private sector activity could boost growth and the measures could ease economic pressures.

“There is some hope in South Africa’s public finances, mainly due to the increase in government revenue as a result of higher exports of raw materials, but also due to progress in reducing debt and debt problems and the introduction of a public deficit,” Aleix Montana, Africa analyst at consultancy Verisk Maplecroft, he told CNBC last week.

However, political weaknesses and persistent problems of the state-owned public enterprise continue to pose economic risks.

Ramaphosa is facing “a perfect storm of inflation, blackouts and corruption allegations that will continue to tarnish South Africa’s profile and pose a risk to investment in the country,” Montana said.

The National Assembly is due to consider a report on the alleged corruption scandal involving Ramaphosa on December 6, just 10 days before the party conference of his ruling ANC (African National Congress).

Energy problems

Although Ramaphosa is expected to secure a second five-year term, Montana said he will need to improve his credibility on economic and anti-corruption reforms to continue with his plan. The economy also remains at risk due to persistent disruptions in state-owned enterprises such as the electricity company Eskom.

South Africans are facing constant blackouts as Eskom – long a thorn in the side of the country’s economy – struggles with a lack of generating capacity due to equipment breakdowns and diesel shortages.

The company has warned that power outages, known as “load shedding”, will continue for the next six to 12 months and recently said it has run out of funds to buy the diesel needed to run the auxiliary plants used during periods. peak consumption or emergencies.

Montana said that to ensure sustainable economic growth, the South African government will need to prioritize energy sustainability.

“Energy will require financial assistance from international actors, but they will also need to ensure that it does not have a negative impact on South African society,” he said.

Classification of electricity problems in South Africa as

“In addition to the financial challenges, many South African citizens are employed by Eskom or in the fossil fuel sector, so the government will need to ensure that they mitigate this potential impact of the transition from a fossil fuel-based economy to the implementation of renewable energy sources in their plan. in order to maintain the stability of electricity.”

Asked about the issue during a recent state visit to the United Kingdom, Ramaphosa told CNBC’s Arabile Gumede that Eskom’s problems began long before 2014, when former President Jacob Zuma appointed him to deal with the country’s energy woes.

“While we are generating electricity, the power plants keep breaking down – many of them are old – but we are trying with the new boat, the management that is in place, to solve this problem,” Ramaphosa said.

“So Eskom’s problems were seeds that were sown many years ago and not in 2014, and because we are dealing with huge, complicated and complex machines, this is not an overnight solution, it never can be, because these are very complex processes .”

South Africa's economic recovery is vulnerable to civil unrest, says analyst Verisk Maplecroft

He added that the government was working to reduce load shedding requirements and “make sure the money is there”, noting that Eskom “used to be the best utility in the world.”

“Do I have confidence that we will resolve these issues? Yes, I do. I have tremendous confidence that we will resolve them,” he said.

“But I think it’s important to appreciate where we’re coming from, and obviously it’s very easy to put all the blame on the president, all the blame on the government, and yet these problems have come back from the past.”

‘Taming the monster’ of inflation

In addition to domestic problems unique to South Africa, the country is also facing the same inflationary pressures that have plagued economies around the world over the past year.

Headline annual inflation rose to 7.6% in October, defying South African central bank expectations that price pressures would ease. That prompted the bank’s monetary policy committee to raise interest rates by an aggressive 75 basis points last week, taking the benchmark repo rate to 7%.

It was the seventh consecutive meeting at which monetary policy was tightened, and central bank governor Lesetja Kganyago told a news conference that she had to “tame the monster of inflation”.

With prices rising much faster than the central bank’s 3-6% target, Kganyago noted that the SARB needs to see clear evidence that inflation has not only peaked, but has started to decline sustainably towards the middle of the range.

But further tightening of monetary policy will put additional pressure on the economy.

“We think inflation is unlikely to return to the target range (let alone the middle) in the coming months, keeping policymakers on a tightening path well into 2023,” said Virág Fórizs, emerging markets economist at Capital Economics.

South Africa's central bank governor says it's hard to say whether the end of the rate hike cycle is near

She noted that food inflation continued to rise, offsetting some of the easing effects of fuel price pressures, while core inflation was likely to remain high. Capital Economics expects inflation to hover around 7.5% annually through early 2023, before easing markedly in the middle of the year.

Fórizs said the weakness of the economy was unlikely to prevent further rate hikes, with growth concerns taking a backseat to inflation concerns. South Africa’s GDP shrank by 0.7% in the second quarter.

“Although the end of the tightening cycle is not yet in sight, we expect the pace of tightening to slow at the next MPC meetings,” she warned.

Three members of the MPC voted last week to raise interest rates by 75 basis points, while two voted in favor of a 50 basis point increase. It marked an apparent softening of the approach by some who voted for a 100 basis point hike at the previous meeting.

“We have fully mapped a 100bp further increase in the repo rate, to 8.00% by the second quarter of 2023,” Fórizs said.

Source link