Sovereign Analysis /
South Africa

Commodity price boom masks South Africa's fundamental problems

  • South Africa has benefitted from high commodity prices, with a substantially improved fiscal and external backdrop

  • But its longer-term prospects remain cloudy amid limited reform momentum – likely to keep per capita growth negative

  • And there are still big risks to the budget, leading to wide divergence between the treasury and IMF debt forecasts

Commodity price boom masks South Africa's fundamental problems
Patrick Curran
Tellimer Research
10 May 2022
Published by

Based on our discussions over the course of the IMF/WB Spring Meetings, as well as the Fund's recent World Economic Outlook, we present our key takeaways on Nigeria. For more details, read our in-depth "IMF/WB Spring Meetings, April 2022 – country notes and global themes" report.

Notwithstanding the improvement to South Africa’s twin deficits from the terms-of-trade shock, the longer-term outlook remains weak. The IMF projects real GDP growth of just 1.4% over the medium term and projects a continued rise in debt, suggesting that it does not see the National Treasury’s fiscal consolidation plans as credible.

There is seemingly little reform momentum, with growth unlikely to reach sustainably positive per capita levels without major structural reforms in the areas of product and labor market, state-owned enterprise (SOE) management, energy security, transportation bottlenecks and education, among others. Against this backdrop, there will be few inroads to lowering South Africa’s astronomical unemployment rate.

Key risks to the budget include likely overshoots on wages, SOE transfers and social grants, and there is a risk that commodity windfalls translate to permanent spending increases. Conversely, the inflation outlook is more favorable given a relatively modest rise in recent months and the South African Reserve Bank’s strong track record of inflation targeting, with expectations likely to remain relatively well-anchored.

Overall, South Africa has been a key beneficiary of the rise in global commodity prices, and is in a substantially less vulnerable position than it was at this time last year. However, the longer-term outlook is little changed, and we see little prospect of an improved reform backdrop as the political cycle starts to heat up towards the end of the year ahead of the ANC’s Elective Conference.

We retain our Hold recommendation on South African eurobonds and Buy recommendation on local currency government debt, given the positive terms-of-trade shock and high real yields.

South Africa WEO

See here for a summary of our discussion with Dr. Chris Loewald, Head of the Economic Research Department and MPC member at the SARB.