Will the South African Economy Recover?

South Africa has the world’s 39th largest economy.
They have the world’s 24th largest population.
GDP growth has been minimal for South Africa in recent times. With a heavily hit economy slowly recovering after the pandemic, and many social and global challenges, only a very effective strategy will be able to consolidate the recovery.

In this blog, we explore some of the economic challenges South Africa are facing, and what chance they have of successfully addressing them. You can send money to South Africa today with e-Pocket, at extremely competitive exchange rates.

The Current Situation

According to Finance Minister Enoch Godongwana, the South African economy grew by just 0.6% in 2023, which is significantly below world averages. Godongwana estimates that this number will grow to 1.6% over the next three years: “The growth outlook is supported by the expected easing of power cuts as new energy projects begin production, and as lower inflation supports household consumption and credit extension.” He added that “there are also risks to the domestic outlook. These include persistent constraints in electricity supply, freight rail, and ports, and high sovereign credit risk. Our challenge … is that the size of the pie is not growing fast enough to meet our developmental needs”.

Given there has been deterioration in many areas, such as rail, ports, security and water, the ability of the economy to actually produce has been severely hampered in recent times. Whilst these are rightly understood to be significant challenges, Godongwana believes structural reforms can improve the situation: “This agenda has included areas like electricity, logistics, water, telecommunications, and visa reforms”. Should these changes be successfully implemented, the South African economy will be in a much better state in five years’ time, with the country seeing far lower unemployment and poverty rates.

These problems also have flow-on effects. For example, tax revenue collection was significantly lower than expected in the first half of 2023, while public sector wage settlement was much higher than budgeted. Debt servicing costs have been increasing as well. By August of 2023, debt repayments had already reached 4.9% of GDP and 20% of fiscal revenues. Net exports have been down in the last two years; -2.0% in 2022 and then -1.5% in 2023. This is expected to reduce -0.7% in 2024, then -0.6% in 2025.

But the positives are there. Like many other countries around the globe, South Africa was hit hard by the pandemic. Their GDP went backwards by -6.4% in 2020, but recovered relatively well with a 4.9% growth in 2021. Consolidating GDP growth will be important. According to the OECD, the surprising 0.4% and 0.6% growth of GDP in the first two quarters of 2023 were “driven by investment in infrastructure, machinery and equipment, including renewable energy products to address long standing electricity shortages.” In another positive, employment rates had returned to pre-pandemic levels by July, signifying a slow but steady recovery.

Growing the South African Economy

According to statista.com, the South African unemployment rate steadily grew from 20.02% in 2003, all the way to 29.81% in 2022. While employment rates are generally low in urban areas, they are even lower in rural areas, while the number also varies greatly from province to province. For example, the unemployment rate in Western Cape sits at around 20.2%, while that number is 38.8% in Eastern Cape.

South Africa’s economy has great potential, regardless of some negative trends in recent years. They boast Africa’s most industrialised economy, as well as a significant amount of natural resources and investments in other African countries. Despite having the sixth largest population in the continent, they have third largest GDP; a long way ahead Algeria in fourth, and close to Nigeria and Egypt above them. Their GDP of $6,190 USD per capita, is the sixth highest in Africa as well.

Going forward, South Africa is aiming to reduce its heavy reliance on fossil fuels. With many blackouts in recent years, and an ageing power grid, they are seeking more sustainable long-term solutions. Sizeable investments from foreign powers like the United States and China offer significant growth opportunities. The China Development Bank has given significant loans to Eskom, South Africa’s state power company, while the United States is also helping with decarbonisation. The Just Energy Transition Partnership, for example, sees the United States working with Germany, France, the EU, the UK to mobilise grants, loans, and investments. The program is designed to assist South Africa’s energy transition, starting with an initial commitment of $8.5 billion USD.

Addressing South Africa’s economic issues is far more complicated than investment. According to the South Africa Economic Update, Safety First: The Economic Cost of Crime in South Africa, reducing crime rates will be crucial to improving the economy and society at large. Indeed, worldbank.com explained that crime rates undermine “the country’s economic dynamism, with an impact estimated to be at least 10 percent of GDP every year”. The unfortunate reality is that money that could be contributing to economic growth instead goes to protection costs, rebuilding costs, replacing items and so many other associated costs.

The report also discusses how to tackle these crime rates, such as by addressing the declining capacity of the police force and confronting the root causes of high crime rates.

Conclusion

The PwC expects the South African finance minister “to announce an increase in taxes towards raising more revenue for the 2024/2025 fiscal year”. While this might be a strain on many citizens, it would also allow the government more spending power to invest in crucial infrastructure. With an aim of raising an additional R15bn, PwC believes an increase of roughly 0.5% across all tax bands is required.

Growing an economy with so many challenges is a difficult task, especially given the array of local and geopolitical issues. Nonetheless, Investec is forecasting a 1.1% increase to the GDP this year, and a year-on-year increase until 2027, when they expect growth to be 2.0%.

Take advantage of our smooth service today: send money to South Africa.You can also read more about other African countries on our blog page.