Finance Minister Enoch Godongwana has slashed South Africa’s economic growth forecast for 2023, citing the impact of the intense electricity supply shortages as the single biggest risk factor.
Although South Africa’s economy is estimated to grow by 2.5% in 2022 from a previously forecast 1.9% on the back of the stronger-than-expected rebound in the third quarter, persistent power cuts have dimmed the outlook in the medium term.
Eskom’s deteriorating electricity generation capacity is expected to worsen further this year after the power utility implemented record levels of load shedding in 2022, with 207 days of rotational power cuts compared with 75 days the year before.
Delivering his 2023 Budget speech in Parliament, Godongwana said the lack of reliable electricity supply was the biggest economic constraint.
Godongwana said the severe power outages, high inflation, higher interest rates and weaker global economic activity would weigh on economic activity in 2023.
He said the global economic risks remained high, including those related to the ongoing war in Ukraine, and could impede growth if they materialised, but the reopening of the Chinese economy might offer some reprieve by supporting a stronger rebound in global trade and demand.
In the best-case scenario, Godongwana said gross domestic product (GDP) growth was expected to slow to 0.9% in 2023 from an estimated 2.5% in 2022, before averaging 1.7% per annum in 2024 and 2025.
However, he said the worst-case scenario set growth at 0.3% in 2023, in line with the forecast by the SA Reserve Bank (SARB), if the energy crisis continued to weaken activity.
“At R4.6 trillion, the size of the economy in 2022 was bigger than the pre-pandemic levels in real terms, evidence of a robust economic recovery even in the face of lingering Covid-19 scarring,” Godongwana said.
“However, the medium-term growth outlook has deteriorated. Real GDP growth is projected to average 1.4% from 2023 to 2025, compared with 1.6% estimated in October.”
Godongwana anchored South Africa’s pursuit of higher growth on three pillars.
He said the government would ensure a stable macroeconomic framework to create a conducive environment; implement growth-enhancing reforms in key sectors, particularly in energy and transport; and strengthen the capacity of the state to deliver quality public services, invest in infrastructure and fight crime and corruption.
Anchor Capital’s investment analyst, Casey Delport, said the Treasury’s new economic growth forecasts might err on the side of optimism, as the SARB’s estimate of 0.3% growth was more realistic.
Delport said that overall the 2023 Budget created a sense of policy continuity in difficult fiscal and socio-economic times for the country, which in turn would be viewed positively by financial markets.
“Nonetheless, investors will naturally remain concerned about the numerous downside risks to SA’s economic growth trajectory amidst record load shedding, a less supportive global economic backdrop, and an upside risk to spending on social grants, wages and SOE (state-owned enterprise) support,” Delport said.
Although Godongwana said implementing growth-enhancing reforms was a crucial element of the growth strategy, including Operation Vulindlela, economists have lamented the slow pace with which the government was implementing them.
Momentum Investments economist Sanisha Packirisamy said the pace of reform efforts remained underwhelming, particularly against a backdrop of pedestrian growth, and argued for more momentum behind implementation.
“Low growth remains a fiscal risk in the context of a more fragmented voter base and rising socio-political demands on the public purse in pursuit of upward mobility in the absence of sufficient employment opportunities,” Packirisamy said.
“As such, South Africa’s path towards fiscal consolidation and debt stabilisation continues to be wedged between low-growth outcomes and rising expenditure pressures.”
Click here to view Business Report’s full coverage of the budget speech.
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