South Africa: Between a rock and a hard place

5 min
St├ęphane Colliac
St├ęphane Colliac Senior Economist for France and Africa

South Africa is increasingly entrenched between leeway for monetary easing and a snowball effect on growth and debt. The South African Central Bank joined a set of Emerging Markets (Korea and Indonesia) that eased their policy rate preemptively before the US Fed, which is expected to do the same at the end of the month. The easing in South Africa was by -25bps, sending the policy rate to 6.5% (after a hike of the same path in November 2018). However, as low growth has continued for six years now (2019 should see +0%), the fiscal deficit is reflecting heightened cyclical pressures and should reach -5% of GDP. This low growth is also a byproduct of structural factors, such as the blind run of the power sector, where investment and financing were both missing for a long period. Now that Eskom needs financing, there is an upside risk to both debt and taxes, since the government will have to finance a USD 9.2bn (2.5% of GDP) cash injection in the next three years, meaning no respite for growth even in 2020 (+1%).