Bank of America slashes South Africa’s growth forecast to 1%

Bank of America has recently announced a significant downgrade to its growth forecast for South Africa’s economy, projecting a mere 1% growth for the year 2023. This marks the third time the bank has revised its forecast, citing ongoing energy supply shortages as a major contributing factor to the dismal outlook. The economic analyst Tatonga Rusike, Economist at Bank of America Sub-Saharan Africa, explained the rationale behind the revision in a recent interview on CNBC Africa. According to Rusike, the South African economy demonstrated an M-shaped recovery from the pandemic, with highs and lows balancing out to show resilience. However, with persistent energy supply challenges, particularly the intensity of load shedding reaching stage 4 and above, the pace of economic growth is expected to suffer. The energy supply bottlenecks have become a significant hindrance in the early part of the year, leading to the downward revision to 1% growth. This downgrade comes despite efforts by businesses to adapt to the long-standing issue of load shedding in the country. While companies have implemented systems to cope with intermittent power outages, the prolonged and severe nature of load shedding, especially above stage 4, presents challenges that can significantly impact operations and increase costs. Sectors like manufacturing, mining, agriculture, and transportation are among those most vulnerable to the effects of load shedding. Furthermore, the South African economy faces additional headwinds from slowing consumption spending due to successive interest rate hikes throughout 2022. The cumulative effect of these rate increases, coupled with average inflation levels, is expected to lower real incomes and dampen consumer spending. With the latest forecast of 1% growth, South Africa is far from achieving the desired growth rates necessary to match population growth and ensure positive per capita growth. As South Africa grapples with these economic challenges, attention turns to the upcoming interest rate decision. Bank of America expects a conservative 25 basis points increase in rates, driven by both global and domestic factors. The global economic slowdown and potential US dollar strength in the latter half of the year are anticipated to ease domestic inflation pressures, leading to a more subdued rate increase trajectory. However, the bank acknowledges the possibility of a 50 basis points hike, depending on evolving economic conditions. Looking ahead, Bank of America foresees a gradual normalization of interest rates towards a terminal rate of around 7.5% by 2024, aligning with the South African Reserve Bank's inflation target range of 3 to 6%. Nevertheless, the path to achieving this target is contingent on a prudent monetary policy approach and continued inflation moderation. In light of the pressing challenges surrounding electricity supply, particularly the imminent tariff increase granted to Eskom, South Africa faces tough decisions ahead. Should Eskom implement the proposed 19% tariff hike, it is expected to add 0.3 percentage points to the inflation trajectory, impacting consumer prices and affordability. On the other hand, a potential postponement of the tariff increase poses implications for the national treasury's budget and ongoing fiscal reforms. With ongoing efforts to address Eskom's operational and financial issues, including debt restructuring and capacity expansion, the country aims to mitigate the impact of load shedding and foster a more stable energy sector. Despite the current economic uncertainties, analysts suggest that structural reforms and effective governance will be essential in navigating South Africa through these challenging times and towards sustainable economic growth.