SOUTH AFRICA

After the initial outbreak of the Covid-19 crisis, stringent containment measures helped in saving thousands of lives but also seriously undermined economic activity. In 2020, the South African real GDP shrank by -7%, leading to the worst economic contraction in the country’s recent history. Importantly, South Africa's growth outlook was already weak before the Covid-19 outbreak, with only +0.2% growth in 2019 (+1.1% on average between 2014-2019), as a result of structural weaknesses as well as poor competitiveness and productivity.  Public sector inefficiencies; underinvestment and poor infrastructure, particularly in the energy sector; low-skilled human capital and persistent regulatory constraints have reduced the country’s growth potential to around +2% over the past decade. Going forward, greater demand for commodity exports from China (its main trade partner) and recovering internal demand should bring a modest boost to economic activity, even as South Africa continues to be severely affected by new waves of infections. We expect GDP growth to rebound by +2.9% in in 2021 and +2.4% in 2022. 

The South African Central Bank (SARB) reduced its policy interest rate to 3.5%, a historically low level when the crisis hit. Yet inflation reached 5%  in summer 2021  on the back of recovering demand, rising commodity prices and past currency depreciations. We expect the SARB to start to raise interest rates by end 2021.  

The World Bank 2020 Doing Business survey ranks South Africa 84 out of 190 economies (it was 74th five years ago). South Africa still retains a good ranking in the protection of minority investors (rank 13th) and paying taxes (54th). However, recurrent power blackouts, difficulties to start a business (139th) and strong barriers to trade (145rd) are key bottlenecks. Barriers to domestic transactions and to register a property (106th) are among other key impediments to business activity. Overall, rigid product and labor markets reduce the country's competitiveness.
Strong impediments to cross-border trade and deeper trade integration with the Southern African area continue to hinder the country’s export potential. However, South Africa is set to become a key beneficiary of the African Free Trade Agreement (AfCFTA), thanks to its established manufacturing bases and existing economic ties within Africa.

South Africa is one of the most unequal countries in the world in terms of income distribution (Gini coefficient =0.7). GDP per capita has been on a declining trend since 2014 as the growing weaknesses of the public sector have been curtailing economic activity. The Covid-19 outbreak deteriorated the economic situation further, with the unemployment rate rising above 32% and income per capita dropping dramatically. We identify South Africa as one of the hot spots regarding social risk, with possible detrimental consequences for economic activity. In July 2021, for instance, a week-long violent riot, which began after the arrest of former president Jacob Zuma, caused significant material damage and property destruction (0.8% of GDP).