An economic overview of South Africa

Growing the economy while simultaneously paying off debt presents a huge challenge but infrastructure plans and green financing options offer opportunities.

The eMendi building at Port of Ngqura is within the Coega Special Economic Zone (Coega SEZ) and is shown with the busy port and Algoa Bay behind it. The building, designed by Dominic Bonnesse Architects and completed in 2017, became the national headquarters of the TNPA in 2021. Credit: Credit: Dominic Bonnesse Architects

Two numbers came to the fore in 2021, one quite modest, the other extremely large. Both the 100 MW extension granted on the ability of private power generators to go ahead with a project without the need for licensing and the R130-billion pledged in green financing to South Africa by several rich countries at the COP26 conference could have far-reaching consequences for the trajectory of South Africa’s economy.

South Africa’s economy has to grow and the country’s debt has to be reduced. How to do these things simultaneously is the challenge for the country’s new Minister of Finance, Enoch Godongwana, who was appointed in August 2021, replacing Tito Mboweni, who asked to be relieved of his duties. Like many of his cabinet colleagues and the president, Godongwana cut his political teeth in the trade union movement but in his first budget presentation, the mid-term budget in November, he did not present any new items of expenditure. Rather, he presented a budget that reflected the fact that there is currently no money to spend on new programmes. There has to be less spending, fewer borrowings and the public debt has to be controlled. Finding a way to grow the economy in that environment will be tough.

As to signals of what the new Finance Minister intends doing in the future, one commentator found significance in how Godongwana spent the unexpected windfall of R120-billion that came the way of Treasury because of the high prices of commodities in 2021.

Professor Haroon Bhorat of the University of Cape Town broke down “every R1 of tax revenue the government received from this lottery” as follows: 51 cents on debt; 17 cents to civil servant wages; 32 cents on relief packages. Bhorat’s conclusion was that government is committed to fiscal consolidation “while being willing to spend within limits on direct transfers.” Which is why the two numbers mentioned above become so critical.

When President Ramaphosa announced that private power investors could create up to 100 MW of power without having to wait for licensing, he potentially opened up a path to growth, a path that has been constrained for some time by the limitations of the national utility, Eskom.

Eskom’s inability to provide enough electricity to power the economy (and its huge debt) rank as the biggest risks to the South African economy. Opportunities for private consortiums such as the Dedisa Peaking Power Plant at the Coega SEZ (below) will expand.

The Dedisa Peaking Power Plant at the Coega SEZ

Eskom’s unbundling will be another spur to growth. The legal separation of transmission is expected to be completed by December 2021 with the other two elements, generation and distribution, to follow. The idea is not to privatise the entities but to find private partners and to allow for competition within the various fields.

The R130-billion pledged by the EU, the US, Germany, France and the UK is not straightforward; it comes as a mixture of grants, risk-sharing instruments and concessional finance but it will allow South Africa to fund projects that will help the country to move away from fossil fuels without further stretching Eskom’s precarious finances.

The commodities attracting the most attention are those which have the potential to power the green economy, platinum group metals (PGMs) and chrome among them. In August 2021, exports were reportedly 44% higher than the year before. Covid obviously had a lot to do with that figure, but R166.5-billion still represented a good number.

Recovery plan

The government’s recovery plan is called the Economic Reconstruction and Recovery Plan (ERRP) and it has a focus on expanding and improving infrastructure, a public employment stimulus, local industrial development and the expansion of energy generation.

The plan intends to unlock R1-trillion in private investment. Furthermore, a commitment is made to improving the capability of the state and to remove barriers to doing business or investing in the country.

Enabled in 2020 by an amendment to legislation that allowed them to work with the evidence presented to the state capture commission, National Prosecuting Authority (NPA) prosecutors quickly finalised cases and arrests started happening. After a decade in which it seemed that immunity was guaranteed for corrupt officials and employees of state-owned enterprises, the tide started to turn. In 2021 ex-president Zuma’s refusal to appear before the commission led to him spending time in jail. His trial on substantive corruption charges lies ahead.

The outbreak of looting and violence that appeared to be triggered by Zuma’s jailing probably had more to do with the frustration felt by many South Africans at the culture of impunity which has surrounded many politicians and thieving business people than it did with the specifics of the Zuma case. The looting happened at supermarkets after all, not where Zuma was incarcerated.

Prosecutions obviously do not provide certainty against future corruption, but at least the prospect of arrest might be a deterrent. One of the biggest obstacles to economic recovery is South Africa’s level of debt, and that is caused largely by the state electricity utility, Eskom, where corruption was rife for years.

The government’s directory lists 131 state-owned entities but there are said to be about 700 altogether, at various levels of government. Entities include the Central Energy Fund, the Commission for Conciliation, Mediation and Arbitration, the Commission for Employment Equity and the Companies and Intellectual Property Commission (CIPC) but the three biggest, all of which fall under the Department of Public Enterprises, are Eskom, South African Airways (SAA) and Transnet, with five large divisions covering ports, railways and logistics. Eskom and SAA are significant drains on the country’s finances and getting control of all of the country’s SOEs is another major priority.

At municipal level, the decision by Clover to relocate their large cheese factory away from Lichtenberg in the North West to Queensburgh in KwaZulu-Natal had everything to do with a dysfunctional local government unable to supply basic services. If South Africa’s rural areas and smaller towns are to thrive, more interventions at this level are needed.

Agriculture was another industry that saw some positives during the Covid-19 lockdown. Although sectors like wine suffered badly, a reported increase in maize exports, as well as greater international demand for citrus fruits and pecan nuts, helped the industry expand by 15% (StatsSA). Grain crops such as maize, wheat, barley and soya beans are among the county’s most important crops. Only rice is imported. Wine, corn and sugar are other major exports.

Basing economic growth on a devaluing currency is not always the best long-term method of boosting economic growth, but high-value agricultural exports and increased numbers of high-spending international tourists hold some promise for helping to get the South African economy back on a growth path. Horticulture in particular is seen as holding great potential not only for increased earnings, but for creating jobs.

South Africa’s traditional strength in minerals still holds good. Although gold mining is declining in volumes (even while prices rise), the major investment of Vedanta Zinc International in a project in the Northern Cape and Sibanye-Stillwater’s acquisition drive in the PGM sector are significant economic drivers. Coal and iron ore continue to be exported in large volumes through the Richards Bay Coal Terminal on the east coast and the Port of Saldanha on the west coast.

GRI Towers South Africa is making wind turbine towers in the Atlantis SEZ, a green technology hub. Credit: Gestamp Renewable Industries

Automotive manufacturing and automotive components remain vital sectors, with major investments by most of the major marques and increased exports a feature of recent activity. There has been inward investment in recent years, most notably by the Beijing Automotive International Corporation (BAIC) in the Coega Special Economic Zone outside Port Elizabeth. The Tshwane Automotive Special Economic Zone (TASEZ) has been launched at Silverton in Pretoria.

A new SEZ has been formally declared in the northern part of Limpopo, the Musina-Makhado SEZ. The Namakwa SEZ in the Northern Cape is awaiting its license, as is the Fetakgomo-Tubatse SEZ in eastern Limpopo.

Read more in the South African Business 2022 edition (eBook):