South Africa

Country Risk
Report

Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Country Rating
Stagnation ahead due to electricity blackouts,
C3
SENSITIVE RISK
factionalized elites and policy distraction for enterprise

Business Political risk

Economic risk
environment risk

Commercial risk Financing risk

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Strengths &
weaknesses
+ -
Key strategic economic and political player Social tensions and insecurity persist amid
in the region, with a rich natural resource high poverty, income inequality and
base (gold, platinum, chrome, manganese, endemic unemployment (above 30%)
vanadium, coal and diamonds) and judicial Structural issues weigh on potential growth
and business environments ranking above while the electricity crisis has been declared
the regional average a national state of disaster, with flood
Exchange-rate flexibility helps to cushion damages increasing the losses caused by
external shocks and the central bank has an load shedding
established track record of proactive and Elevated dependence on portfolio
credible policy stances investment flows and aging infrastructure
Deep financial markets and a sound banking (energy and transport) limit the
sector (overall ample liquidity, good asset development of a diversified industrial base
quality, satisfactory capitalization)
Exchange rate flexibility helps to cushion
external shocks and the central bank has an
established track record of proactive and
credible policy stance
Deep financial markets and a sound banking
sector (overall ample liquidity, good asset
quality, satisfactory capitalisation)

2 Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Economic
overview

The South African economy is expected to

stagnate in 2023, with annual inflation
above the central bank’s target

The South African economy is expected to stagnate in 2023, roughly 2.5-3.0pps below the average growth
for Sub-Saharan Africa. The activity rates of the extractive sector will lag behind those of the
manufacturing sector. In spite of a favorable price trend for metals brought on by the Chinese reopening
and increased demand for safe havens due to geopolitical uncertainty, the production of mining products
(particularly coal) may continue to be subdued.

Annual inflation hit 6.9% in 2022, with food costs well in the double digits since Q3 2022 and fuel and
transport prices providing some downward pressure from last year's highs. Food prices have increased by
more than 25% on average compared to January 2020. The inflation rate is still above the upper bound of
the 3.0-6.0% band set by the central bank, which could trigger another 25–50bps increase in the key policy
rate to 7.50–7.75% before a window of opportunity for a pause opens. It is probable that inflation will then
stabilize at around 6%, maintaining a differential from long-term global inflation of roughly 3-4% and
allowing for a gradual depreciation of the local currency, the rand.

3 Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Electricity generation poses the heaviest drag on
growth, with the national utility being able to work at
only half of its nominal capacity. This lack of reliable
electricity supply hinders businesses, industry and
households from realizing their potential. Policies to
increase the supply of electricity in the private sector
were only put into place in 2021–2022, and it is
unlikely that the known private commitments to
increase generation capacity to be operational in
2023 will be enough to meet demand.

The business sector, especially the mining industry,

has already expressed interest in generating its own
electricity. However, in order to produce the
maximum 100 megawatts permitted and sell the
remaining energy to the grid, at least 250 private
producers are estimated to be needed. While labor
unions are likely to mobilize strikes in opposition to
loosening local content rules for new generation
capacity, it is improbable that sufficient capacity will
materialize in the upcoming 12 months.

Protracted electricity load shedding – which is

anticipated to last 250 days in 2023 – rising social
unrest and violence (recorded cases of intentional
murder increased by +10.1% y/y in Q4 2022 to reach
7,555 events) and the need to increase social
spending before the 2024 election all pose risks to
the outlook.

4 Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Interest on debt remains high, but the
budget deficit surprises on the positive side

Due to a considerable short-term absorption of revenues to repay for interest on debt and an
increase in sovereign bond yields to the present level of 7.5% for two-year maturities, South Africa
ranks in the worst quintile in our public debt sustainability risk assessment as of end-2022.
Conversely, the present inflationary cycle helped to create the largest budget surplus ever between
April and December 2022, supporting the trend towards the predicted decline in the fiscal deficit in
FY 2022–23. The total deficit for the time period was only 2.8% of GDP, which is a substantial
improvement over the past three fiscal years, during which the deficit averaged 5.2% of GDP. The
primary contributors to revenue growth were personal income tax (PIT), corporate income tax, local
and import VAT, as well as import customs duties. Salary increases and bonuses led to larger PIT
inflows, and greater inflation bolstered VAT revenue streams.

Although the level of government debt is still elevated, the ratio is expected to stabilize at little more
than 70% of GDP, including government guarantees on state-owned enterprises’ (SOEs) debt.
Interest payments are part of the price of the favorable debt structure, which is primarily
denominated in local currency and has a lengthy amortization profile on average (12 years). Fiscal
consolidation will continue, with increased tax collection and disciplined salary increases providing
some flexibility to meet mounting social demands and moderately support SOEs in case of need.
Although the country's dependence on foreign capital makes it susceptible to "sudden stops" (a
sudden change in investor appetite), the external balance has so far been resilient to shocks. Buffers
include a flexible exchange rate, limited external debt in foreign currency and substantial external
assets that make South Africa the largest net investor on the continent, with a net position of
USD59bn (14% of GDP).
Due to its slow-growing and generally volatile
export markets, South Africa has a high import
propensity of 28% of GDP, which should keep the
country's external accounts in the negative and put
pressure on the rand. The rand's value also depends
on price discrepancies with the rest of the world,
fluctuations in commodity prices, the current
account deficit and the amount of foreign reserves.
Rand upside pressures include a persistent increase
in foreign investor interest in developing economies
and upwardly moving commodity prices as global
GDP progressively recovers. These factors should
buffer the currency's longer-term depreciation
trend.

5 Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Interest on debt remains high, but the
budget deficit surprises on the positive
side
Due to its slow-growing and generally volatile export markets, South Africa has a high import propensity of
28% of GDP, which should keep the country's external accounts in the negative and put pressure on the
rand. The rand's value also depends on price discrepancies with the rest of the world, fluctuations in
commodity prices, the current account deficit and the amount of foreign reserves. Rand upside pressures
include a persistent increase in foreign investor interest in developing economies and upwardly moving
commodity prices as global GDP progressively recovers. These factors should buffer the currency's longer-
term depreciation trend.

6 Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Trade structure
Trade structure by destination/origin (% of total, 2021)

Exports Rank Imports

Trade structure by product (% of total, 2021)

Exports Rank Imports

7 Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.