It was always going to hurt when interest rates started to climb again after the abnormally low levels seen during the worst of the Covid-19 years, but the inexorable rise to 8.25% in May from 3.5% in September 2021 was brutal for those who had debt repayments to service. The decline in annual consumer inflation to 5.5% in November from 5.9% in October - its first contraction since July - helped to convince economists that the SA Reserve Bank (SARB) will at last be able to ease off next year.
"The inflation outlook is favourable over the medium term, and this will give the SARB room to lower lending rates in the second half of 2024 and in 2025. We expect around 75 basis points of cuts as a baseline view," said Christie Viljoen, economist and senior manager at PwC in SA.
If Viljoen and other economists are correct about the timing of the rollback in interest rates, South Africans will have suffered a year or more of the highest repayment levels since 2009. Consumers’ financial pain has taken its own toll on the economy, with bad debts rising and banks having to provision many billions of rands for unpaid loans.
Cuts of 75 basis points would only take SA back to a repo rate of 7.5%, which is still above the level at which it started 2023: 7.0%.
The last 100 basis points
"The last hikes in this cycle in 2023 – perhaps as much as 100 basis points – were likely unintended; driven by an unanticipated upside surprise in inflation in March, and in May, the Lady R incident, elevated geopolitical risk, and the selloff in the rand," Razia Khan, Standard Chartered's managing director and chief economist for Africa and the Middle East, said.
"With the inflation outlook improving, we think current rand weakness is temporary and the SARB should be in a position to roll back some of these hikes,’" she said.
Khan also forecasts a decline of 75 basis points next year, but thinks South Africans may be fortunate enough to see the first cut as early as March.
Fuel costs have made all the difference. A drop in petrol prices in November and December helped slow inflation and should contribute again in January, with large cuts on the cards. Of course, SA has no control over global fuel prices, and as Viljoen points out, a big risk factor for the outlook will be the oil price and how it could react to developments in the Middle East. Nonetheless, PwC forecasts fuel should on average cost less in the first quarter of next year compared to the fourth quarter of this year.
Another gremlin lurking in the shadows for 2024 will be food prices. They showed an unwelcome increase in the November inflation data and remain a risk for the economy.
"Food price inflation surprised somewhat to the upside, remaining sticky at 9.0% year-on-year versus 8.8% in October. Seven of the nine food categories increased on a monthly basis in November," independent economist Elize Kruger said.
Insights guiding our thinking about SA agricultural growth prospects in 2023
With their various weightings, the product prices underpinning the increase were mainly milk, eggs and cheese, then fruit, vegetables and sugar, sweets and desserts. Avian flu was the biggest cause for egg supply constraints, but Wandile Sihlobo, economist at the Agricultural Business Chamber, said that with interventions under way in the poultry sector, such as importing fertilised eggs to rebuild parental bird stock, importing powder and liquid eggs and the ongoing processes about possible vaccinations to curb the spread of the disease, "we are hopeful that the prices will likely normalise in the coming months".
Sihlobo added that there will soon be a recovery in fruit supply as the deciduous harvest gains momentum. However, vegetable prices will remain elevated for longer. Potato prices – which rocketed by 65% in the year to November - continue to be a problem. The potato harvest was limited due to poor quality after load shedding disrupted irrigation for much of the year's first half.
Eskom and Transnet
Along with inflation and interest rates, a stabilising power supply should also boost the economy next year.
While 2023 was the worst year on record for power outages, large renewable projects came online and the situation is anticipated to improve. This would have positive effects for businesses, taxes, gross domestic product growth, and confidence levels.
Less certain is the crisis in rail and ports. If Transnet and the private sector can find a way back to SA having a functional railway system, less frenetic and deteriorating national roads and better port operations with higher volumes of goods being imported and exported, it would be a boon for the country’s bottom line.
"The outlook for load shedding in early 2024 is better than what we had this time last year. Efforts underway to improve rail and port logistics will also support a healthier economy. Admittedly, this will take time to have a substantial impact on exports and more," PwC’s Viljoen said.
These same opportunities are SA’s biggest challenges and "structural electricity and transport issues will take many years to resolve and any setbacks or shocks in 2024 to the recovery process will result in delays in righting the ship," Viljoen added.
SA's fiscal situation will no doubt worsen in 2024 and as per the medium-term budget, National Treasury will be looking to plug a R15 billion shortfall. While some economists have suggested this could be done by not adjusting tax brackets for inflation (so-called "bracket creep"), others have mooted an increase in VAT, although that could be a particularly unpopular move when attracting votes will be a top priority for the ruling party.
Bigger picture still bleak
The cost of servicing government debt will climb and an array of embattled state-owned companies will continue to suck money out of the fiscus.
"SA has been the fastest deteriorator among major emerging markets in terms of debt to GDP since 2018," Thalia Petousis, portfolio manager at Allan Gray, said. "The only way to prevent severe fiscal deterioration in the absence of robust economic growth and stabilise our debt is to run a continual primary surplus of up to 1.5% of GDP and to reduce the size of the public sector. Put simply, to save money to pay down a significant part of the interest bill with cash each year.
"To maintain a strong primary surplus would require austerity, which is a thorny issue in a country with such high levels of social poverty."
The challenge for 2024, if SA is up to it, will be to cut spending in areas where it's wasteful and keep the taps open where money is being routed to critical social welfare and infrastructure. To do this likely requires a restructuring of the public sector by closing redundant government departments and reducing headcount, as well as scrapping a host of smaller spending programmes that don’t add value to the economy.
"Fiscal consolidation remains the answer, as well as calling on international funding institutions to afford us with low-cost borrowing packages. If the private sector is allowed to meaningfully participate in areas such as roads, rail, ports, energy, and water, such reform could also have a meaningful impact on economic growth," Petousis said.
