The South African economy may be able to avert a technical recession in the third quarter this year, mainly because the mining and manufacturing sectors are showing some resilience.

Citibank economist Gina Schoeman, speaking during a virtual media session on the 2023 economic outlook for SA, says despite high levels of load shedding, production in these sectors remained in positive territory.

The country is only marginally escaping negative growth in the third quarter.

Schoeman is “optimistically cautious” about the country’s growth expectations for the next two years.

The investment bank forecasts GDP growth of 1.7% this year, 1.4% next year (mainly because of global recessionary conditions) and 1.9% in 2024.

These figures could be conservative if inroads into the electricity supply situation are made through self-generation.

“We can’t really call our baseline view of GDP growth of less than 2% bullish, but we can give more weight to a slightly better upside scenario,” she says.

For the first time ever there is a plan for Eskom, and the private sector has never been as involved as it is now, she adds.

Schoeman is hopeful about private sector involvement in energy generation but remains worried about government involvement when it comes to the process of selling self-generation back into the electricity grid.

Inflation and interest rates 

The factors that keep the South African Reserve Bank hawkish about interest rates are inflation and the local currency’s performance against the US dollar.

Schoeman expects headline inflation to remain “very sticky” and above 7% until the beginning of next year, dropping to 5.5% during the year, and even further to 4.5% at the end of 2023.

Despite this, she believes the Reserve Bank will remain hawkish.
If the rand is weaker than expected against the dollar, it may compromise the downturn in the inflation rate.

“CPI growth [food and fuel] will not come down as quickly as expected, and the [longer] that takes the more expectations of higher inflation remain elevated.”

Thus, a more hawkish approach may result in a 75 basis point interest rate hike next week, and another 25 basis points at the start of next year.

Schoeman expects it to remain at 7.25% for the rest of the year.

Revenue and expenditure

National Treasury is given credit for a job done well in terms of how it has been managing the country’s purse, given the socioeconomic and political situation and expenditure demands.

Schoeman echoes concerns about the lack of adjustments in the medium-term budget policy statement (MTBPS) for expenditure risks.

The three main items of concern are the wage bill, Eskom’s debt, and the continuation of the social distress grant and it being converted into a basic income grant. The social distress grant rolling into 2024 adds around R35 billion.

“I think their risk assessment scenario could have outlined a worst-case scenario if we do not achieve the wage bill, if the social distress relief grant is converted into a basic income grant, and the impact of an Eskom debt transfer.”

Government is sticking to a 3% wage increase, but Schoeman believes requests for a higher increase are not unreasonable and that a 4% increase won’t “break the bank”.
A 1.5% increase next year would add another R15 billion.

Finance Minister Enoch Godongwana announced that government will take over a portion of Eskom’s R400 billion debt. 

How this will play out, however, and the impact on the debt-service costs remains a big unknown.

As it is, the current year will see the debt-service cost increase by almost R6 billion to R308 billion. 
 Source: National Treasury, Citi Research
Party politics 

Citibank expects President Cyril Ramaphosa to get the thumbs-up at the ANC elective conference in December.

All eyes will however be on the top six national executive committee members and how aligned they will be to Ramaphosa.
This will set the scene for the direction the ANC-led government will take with much-needed economic reforms, particularly with Eskom.

Transnet requires urgent attention because of growing fears that it is becoming the next Eskom.

The custodian of the country’s ports, rail and pipelines has been plagued by rampant corruption, looting of assets, and poor supply chain management – as well as infrastructural neglect and criminal activities including cable theft and arson.

Peter Taylor, chief country officer for Citi South Africa, says he is “pretty bullish” about SA and has been for a while.

He believes that Ramaphosa has been a “game changer” for the country, notwithstanding the fact that reforms have been difficult to get through.

With Ramaphosa remaining party president the country could expect a stable political environment for the foreseeable future, he says.