South Africa anticipates muted GDP growth of 1.9% in 2022

South Africa expects 1.9% GDP growth this year, compared to an estimate of 2.1% issued in February.

South Africa’s real GDP growth has been revised to 1.9 per cent in 2022, compared with an estimate of 2.1 per cent in February. Over the next three years, Africa’s second-largest economy after Nigeria is expected to grow at an average of 1.6%. “This level of growth is too low to support our developmental goals. Accordingly, we must take action to put our economy on a higher growth trajectory,” said South African Finance Minister Enoch Godongwana in the 2022 Medium Term Budget Policy Statement (MTBPS) on Wednesday 26 October.

South Africa: An underperforming economy

South Africa’s economy has underperformed for many years, said Minister Godongwana. He attributed this to long-standing structural impediments hampering growth. These included an unreliable electricity supply, a costly and inefficient port and rail network, crime and corruption, weak state capacity and high levels of market concentration and barriers to entry that suppress the emergence and growth of small businesses.

These structural challenges have been exacerbated by new ones, including the global economic slowdown, high energy and food prices, and the destruction caused by natural disasters such as the recent floods in KwaZulu-Natal.

Regulations in the energy market

Several policy and regulatory changes aimed at creating a competitive energy market are also underway. These include the removal of the licensing threshold for embedded generation projects, where the pipeline has grown to 100 projects, representing over 9,000 MW of capacity.

The Electricity Regulation Amendment Bill provides for an independent transmission and system operator, which will fundamentally transform the electricity sector. Reducing South Africa’s reliance on a single monopoly utility and unlocking massive new private investment in generation capacity will contribute significantly to long-term energy security.

Logistics

Inefficiencies in the port and rail network are costing the economy billions and further undermining efforts to raise growth. Several steps are being taken to introduce greater competition and efficiency, including the Economic Regulation of Transport Bill. This will establish an independent transport regulator to encourage greater competition and enable regulated access to the network. In addition, requests for proposals have been issued for third-party access to the freight rail network and private-sector partnerships for the Durban Pier 2 and Ngqura container terminals.

The process to establish a water regulator through the National Water Resources Infrastructure Agency Bill is also on track. The agency will enable effective management of bulk water infrastructure and facilitate private sector investment.

Leveraging fixed investment

Leveraging fixed investment is critical to achieve sustainable and inclusive growth. It supports economic recovery, raises the economic potential and creates jobs. Gross fixed capital formation has contracted on average by 4.4% annually between 2016 and 2020, from a peak of R796 billion in 2015. Private sector investment, which accounts for nearly two-thirds of total fixed investment, as well as the public sector, have both declined.

Infrastructure

Over the medium term, government consolidated spending on building new and rehabilitating existing infrastructure will increase from R66.7 billion in 2022/23 to R112.5 billion in 2025/26. This includes roads, bridges, storm-water systems and public buildings.

Debt and the deficit

Government debt is projected to exceed R4.7 trillion in the current financial year, compared to R627 billion in 2008/09. This debt is incurring debt-service costs that will average R355.2 billion per year over the medium-term expenditure framework. Debt-service costs are estimated to be R5.9 billion higher in 2022/23 than anticipated at the time of the February budget.

A consolidated fiscal deficit of 4.9% of GDP is projected in 2022/23. This will decline to 3.2% of GDP by 2025/26. A primary fiscal surplus of 0.7% of GDP will be achieved in 2023/24. This is one year earlier than projected at the 2021 MTBPS. Gross government debt is expected to stabilize at 71.4% of GDP in 2022/23 — two years earlier, and at a lower level, than projected in the 2022 budget review.

Revenue collection

Since the 2022 budget, revenue collection has exceeded projections, with the gross tax revenue estimate for 2022/23 revised up by R83.5 billion to R1.68 trillion. The higher estimate is largely due to improvements in corporate income tax collections, together with strong receipts from the finance and manufacturing sectors.

The better-than-expected revenue collection estimates, including over the medium term, have allowed government to narrow the deficit and mitigate lingering and new risks. “Equally, it allows us to gradually restore the baseline budgets of departments key to the delivery of services, without making unaffordable permanent commitments,” said Minister Godongwana.

Government spending

Overall, consolidated government spending is projected to increase from R2.21 trillion in 2022/23 to R2.48 trillion in 2025/26 at an average growth rate of 4%. The social wage, totaling R3.56 trillion over the next three years, or 59.2% of the consolidated non-interest spending, will take up the biggest share of the budget in support of poor households and the most vulnerable in society.

The largest allocations are directed to the education, health and social development sectors. Over the next three years, spending increases will be prioritized to improve investment in infrastructure and boost the budgets for safety, security and fighting corruption. Overall, government’s consolidated capital spending will increase from R95.1 billion in 2022/23 to R145.4 billion in 2025/26. This excludes spending on State-owned enterprises (SOEs).

Financial support to SOEs

Minister Godongwana said the financial support to SOEs recognizes their potential to contribute to long-run growth prospects. A Special Appropriation Bill will be tabled to provide additional funding to Denel, Transnet and SANRAL. These allocations will allow these entities to adjust their business models and restore their long-term financial viability.

Transnet is allocated R2.9 billion to ensure the return of out-of-service locomotives. This will be complemented by R2.9 billion from in year spending adjustments to deal with flood damage that affected its operations in Ethekwini.

Denel is allocated R3.4 billion to support recent progress made to stabilize the entity. This allocation will be augmented by R1.8 billion in sale of non-core assets and will unlock a committed order book of R12 billion awaiting execution.

Turning to Eskom, Minister Godongwana said that, to ensure the electricity utility’s long-term financial viability, government will take over a significant portion of the utility’s R400 billion debt. This will allow Eskom to focus on plant performance and capital investment and ensure that it no longer relies on government bailouts.

Support from the BLSA

In a statement, Business Leadership South Africa (BLSA) welcomed the 2022 MTBPS tabled by Minister Godongwana as affirming the country’s adherence to a policy of fiscal consolidation that will lead to better growth in the future. “BLSA views the MTBPS as showing that South Africa is making progress and that the ship is turning around, although very serious challenges remain in our quest to build an efficient, growing economy that is able to create jobs.”

South Africa is currently under threat from grey listing.