South Africa

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South Africa – February 2022

South Africa has seen a marked decline in GDP growth rates since 2012, significantly lagging the African regional average. Political instability, fiscal and external liquidity constraints, weakness in the mining sector and high unemployment weigh on investment and growth. Nevertheless, South Africa outperforms most regional peers on measures of per capita income, creditworthiness and business climate.

The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2022 and 2026. Business climate is measured by the World Bank’s latest Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.

Economic outlook

The COVID-19 pandemic exacerbated South Africa’s recession that began in late 2019. Real GDP fell 7% in 2020, its steepest decline in over a century. The economy recovered in 2021, as mining and manufacturing grew on the back of increased global demand and higher commodity prices. Improved mobility supported domestic activity. Yet stagnant growth over the past decade contributes to ongoing high unemployment and income inequality. The near-term outlook remains highly dependent on the path of the pandemic and the vaccine rollout. The IMF forecasts 1.9% growth in 2022, supported by ongoing growth in exports, capital spending and consumption.

South Africa’s young population and location bode well for the long term outlook, even in the face of a slowing birth rate. South Africa has better infrastructure than most other African countries. Moreover, the government has advanced several reforms, including for instance to combat corruption, to promote medium-term growth and fiscal consolidation. But long-standing economic, financial social constraints, including large external imbalances, high public debt, intermittent energy supply, heavy reliance on commodities and high unemployment are all likely to keep growth below 2% per annum in the medium term.

South African per capita income rose strongly during the global commodity price and investment boom in the 2000s. But incomes have fallen steadily in the past decade amid weak GDP growth and record-high unemployment (of 34.9% in the third quarter of 2021). In the longer term, high youth unemployment will remain a significant challenge to addressing economic and social inequalities.

Country risk

Country risk in South Africa is moderate. The OECD country credit grade is 4, akin to a sub-investment grade sovereign rating. This indicates a moderate likelihood that South Africa will be unable and/or unwilling to meet its external debt obligations. The ongoing challenging economic and fiscal environment weigh on South Africa’s credit rating.

South Africa is ranked 84 out of 190 countries on the World Bank’s ease of doing business gauge. South Africa outperforms the regional average on most gauges of doing business but starting a business and trading across borders are somewhat weaker than peers.

The risk of expropriation is broadly in line with South Africa’s overall country risk rating. The US investment guide notes existing laws entitle the government to expropriate private property for reasons of public necessity or utility. At present, investors have the right to receive compensation following expropriation. A proposal to change the constitution to explicitly allow expropriation of land with no compensation did not pass parliament in December 2021.

South Africa scores in the top half of countries on all dimensions of governance, except political stability and absence of violence. Political risk in South Africa is moderate.

Bilateral relations

South Africa was Australia’s 30th largest trading partner in 2020. Total goods and services trade amounted to about $2.7 billion in 2020, or 0.3% of Australia’s bilateral trading relationship. The COVID-19 pandemic disrupted bilateral trade in the past couple of years; total trade fell about $1 billion in 2020 relative to 2019. Australia’s main goods exports to South Africa include aluminium metals and ore (including alumina), coal, precious metals and specialised machinery and parts. Major Australian goods imports include passenger motor vehicles, engineering equipment and machinery.

The COVID-19 pandemic and associated international travel restrictions has dented services trade over the past couple of years. South African student enrolments in Australia have held up through the pandemic in large part due to remote learning, while tourist arrivals slumped. The ongoing pandemic points to another year of uncertainty for services exports in 2022.

Bilateral investment between South Africa and Australia is broadly in line with trade relations. ASX listed companies collectively are the largest investor in South Africa’s mining sector. Rio Tinto, South32, MC Mining and MRC Australia all have active mining operations, and Orion Minerals and Theta Gold have active exploration projects. The economic relationship is also diversifying into other sectors. For example, Australia’s Cotton On has more than 170 stores in South Africa, including its largest store in the world, and Flight Centre is the largest travel agency in Africa. There has been considerable South African investment into Australia; for example, Woolworths Holdings Limited purchased Australia’s David Jones and Country Road stores in 2014 and Safika Holdings invested in Brisbane Valley Protein—its first Australian agricultural investment—in 2019.