According to a recent report by the Intesa Sanpaolo Study Centre, in the first half of the year, the economy of South Africa has slowed further compared to the already modest growth step recorded in 2015 (+1,3%). From January to June, GDP grew by 0,2%, compared to +1,8% in the same period of 2015. The economic situation of the raw materials market weighs on the economy, which constitute a significant share of exports: in this regard, according to IMF estimates, raw materials subtracted 0,5% from GDP in 2015 considering the direct and indirect impact on other sectors, primarily construction and transport. Nor should we forget the drought conditions, responsible for the loss of 0,2% of GDP in the same period. At the same time, the problems of shortages in electricity supplies persist: in 2015 alone there were over 100 interruptions in supplies, in a country where 75% of installed electrical power comes from coal-fired plants and 10% from gas and hydroelectric turbines.
In the first half of this year, the drought caused a 7,5% drop in agricultural production and contributed, through the negative impact on hydroelectric generation, to the decline in public utility services (-3,6%). Mining activity decreased by 6,5% due to market oversupply of various minerals, interruptions for safety reasons and in the supply of electricity and rising costs. Manufacturing production grew by 1,4%, driven by petrochemicals and means of transport, while construction recorded a lower growth than the previous year (+1,4% compared to +2,6%) penalized by the weakness of public works. Weak domestic demand weighed on services, especially in terms of transport and communication (-0,2%).
On the demand side, from January to June 2016 private consumption recorded a growth of 0,9%, equal to half of that of the previous year, penalized by price increases and restrictive credit conditions, while investments fell by 2,9%, with public works and machinery particularly weak. Foreign trade has made a positive contribution to GDP, thanks to the contained growth of exports (+0,5%, where jewels and means of transport emerge above all) against the drop in imports (-3,3%). In the short term, the growth prospects are mainly affected by the weakness of investments, held back by the negative business climate, by the uncertain prospects of the mining sector and by the increase in credit costs. The high unemployment (26,6%), the modest dynamics of real wages and the fall in agricultural incomes are holding back consumption. Exports continue to be affected by the weakness of the economy in some important export markets. However, a recovery in domestic demand is expected next year thanks both to consumption, which should benefit from a less unfavorable agricultural season, and to investments, especially in mining driven by the expected recovery in prices. In the October WEO, the IMF forecasts South Africa's GDP growth of +0,1% in 2016 and +0,8% in 2017.
In the 2016 fiscal year which ended last March, the state budget recorded a deficit equal to 3,9% of GDP, higher than 3,6% in the previous fiscal year, but in line with the initial target. In the current fiscal year, the Government has indicated a target deficit of 3,2% of GDP: support for revenue is coming from mining royalties following the partial recovery of prices. The public debt to GDP ratio has risen by almost 15pp in the last 5 years, reaching 49,4% in 2015 from 35,3% in 2011, where about a tenth is in foreign currency and a third of the total debt is held by foreign investors. In this context, South Africa's balance of payments shows a structural current deficit (average 4,2% of GDP from 2006 to 2015) mainly due to the remuneration of foreign capital invested in the country. During the first half of the year, the current balance in dollars remained substantially unchanged (-5,6 billion) compared to the same period of 2015. On a trend basis, the IMF expects the current deficit to fall to around 9 billion (3,3% of GDP) for the whole of 2016, from 13,7 billion (4,3% of GDP) last year. Also in the first six months of 2016, the financial account surplus contracted from 2,6 billion to 2,1 billion mainly due to the decrease in foreign portfolio investments (down from 7,4 billion to 3,1 billion).
Weak factors of a cyclical nature are joined by more structural ones. The potential growth rate is held back by infrastructure shortcomings, in particular electricity generation plants and goods movements, and sufficiently skilled workers. South Africa's economy is characterized by a marked duality: alongside a system of advanced services, industries and infrastructure, there is a large underdeveloped informal economy and a large share of the population living in poverty. Over a quarter of the population is out of work. South Africa is also one of the countries with the most unequal distribution of wealth: a large portion of the population does not have appropriate access to health services deemed essential, while unemployment and inequalities fuel widespread crime, social tensions, strikes and demonstrations that often take violent forms. However, against these weaknesses there are some strengths such as a solid institutional framework, the independence of the Central Bank, a diversified economy with a discrete manufacturing base and advanced services, particularly in the financial field.
The weakness of economic growth, the deterioration of public finances, the low degree of coverage of the requirement guaranteed by reserves, the vulnerability of the currency, the high dependence on capital flows from abroad and, recently, the risk of less economic policies market biases have led to a deterioration in South Africa's credit rating. S&P has placed sovereign debt under review for a possible rating downgrade (currently BBB-). Pure Moody's has a negative outlook on its Baa2 rating. Fitch, which last December cut the rating from BBB to BBB-, he recently underlined the danger of a populist turn in the management of the economy.
