South Africa’s economic indicators are currently all pointing towards an impending recessionary period following the latest credit ratings downgrade, shrinking gross domestic product (GDP) while the country has recently been greylisted.
The SA Reserve Bank (SARB) said yesterday that the country’s terms of trade (including gold) deteriorated further in the fourth quarter of 2022 as the rand price of imported goods and services increased while that of exports decreased.
The SARB said the country’s current account balance switched to a deficit of R174 billion, or 2.6% of gross domestic product (GDP) in the final quarter of 2022 from a revised surplus of R3.1bn in the third quarter.
This was the largest current account gap since the third quarter of 2019, as the goods surplus narrowed further to R12.2bn in the fourth quarter from R249bn in the previous quarter, with imports rising and exports falling.
The SARB said the shortfall on the services, income and current transfer account narrowed for a second consecutive quarter to R186bn in the fourth quarter of 2022 from R246bn in the third quarter.
On an annual basis, the balance of the current account switched to a deficit of R31.8bn, 0.5% of GDP, in 2022 from a surplus of R228bn, or 3.7% of GDP, in 2021 – the first annual deficit since 2019.
This data set came just after S&P Global downgraded South Africa’s credit ratings outlook to stable from positive as the persistent rotational load shedding weighs on economic activity.
S&P issued an unscheduled ratings update late last Wednesday night, saying that economic growth in South Africa was facing increasing pressure from infrastructure constraints, particularly severe electricity shortages.
The rating agency affirmed South Africa's long-term foreign and local currency debt ratings at BB- and BB, respectively, meaning that the country was still rated below investment level.
However, it warned that it could lower them if the government’s ongoing reforms to address the power crisis did not progress as planned.
In addition, S&P pointed to the slow implementation of reforms to address infrastructure shortfalls and to improve governance and performance at state-owned enterprises (SOEs) as weighing on growth.
Last month, the Financial Action Task Force added South Africa to the international watchdog’s grey list due to the country’s financial system weaknesses against anti-money laundering and the combating of terrorism financing.
Being greylisted will subject South African companies to enhanced due diligence, more frequent and more invasive assessments, resulting in higher costs for South African businesses and individuals that trade internationally and have bank and investment accounts abroad.
All this comes as the economy is teetering on the brink of a technical recession if growth contracts again in the first quarter of 2023 after shrinking by 1.3% in the final quarter of 2022.
As a result, growth in 2023 is expected to slow to below 1% due to a range of risks, including the continued high levels of load shedding and the deterioration of port and rail infrastructure.
Economists at specialist wealth management firm Citadel have already warned that the economy was heading for a technical recession.
South Africa’s economic activity in 2022 has been resilient in the face of severe and persistent load shedding, totalling an estimated 3 863 hours.
The number of hours of load shedding in the first quarter of 2023 is at just over 1 466 hours, which is already higher than the annual load shedding hours in all the years since load shedding started, with the exception of 2022.
The SARB has increased its estimate of the impact of load shedding on economic growth in 2023 from 0.6% to 2%, signalling that load shedding is expected to persist throughout 2023.
PPS Investments portfolio manager Reza Hendrickse said the worse-than-ever load shedding will continue to weigh for the foreseeable future.
“This broad-based economic weakness is expected to spill over into 2023, with forecasters predicting the economy is already in a recession, typically defined by two quarters of economic contraction,” Hendrickse said.
“Overall, the quarter’s weak GDP print encapsulates the general deterioration in domestic conditions. At the same time, consumers are also having to contend with higher interest rates and an increased cost of living, all of which speak to a challenging environment ahead, locally.”
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