Emerging

A welcome export revenue windfall

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
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SOUTH AFRICA  
A WELCOME EXPORT REVENUE WINDFALL  
South Africa has been severely hit by the Covid-19 crisis, after already several years of very low economic growth and  
social and political tensions. Real GDP collapsed by 7% in 2020 and public finances have deteriorated significantly.  
However, South Africa has also benefitted from a strong improvement in its external accounts. The boom in export  
receipts has supported the rebound in activity and fiscal revenue over the past year. This better-than-expected  
macroeconomic performance has reassured investors and facilitated the coverage of the government’s financing  
needs. However, in the medium term, challenges remain unchanged: large and difficult reforms remain necessary to  
elevate the country’s growth potential and improve public debt sustainability.  
The Covid-19 crisis has plunged South Africa into a severe economic and  
fiscal crisis, following several years of weak GDP growth and gradual  
deterioration in public accounts. Real GDP contracted sharply in 2020  
and sovereign solvency worsened significantly due to the rapid increase  
in fiscal imbalances and public debt. Nonetheless, over the past year,  
macroeconomic performance has been better than initially feared,  
notably because South Africa has benefitted from a great improvement  
in its terms of trade. Strong export receipts have helped the rebound  
in fiscal revenue since Q3 2020. Current account surpluses have fueled  
ZAR appreciation, strengthened external liquidity, and contributed to  
lower financing stress for the government. In the meantime, President  
Ramaphosa appears to have strengthened his authority within the  
ruling ANC over the past year, which has contributed to an improved  
market sentiment as this enhances the prospects for structural reform.  
FORECASTS  
2
019  
2020  
2021e  
2022e  
Real GDP growth (%)  
0.2  
-7.0  
3.3  
4.7  
2.1  
Inflation (CPI, year average, %)  
Government balance / GDP (%) 1  
Government debt / GDP (%) 1  
Current account balance / GDP (%)  
External debt / GDP (%)  
4.1  
4.5  
4.2  
-6.7  
63.4  
-3.0  
52.8  
48.9  
5.7  
-11.0  
78.8  
2.2  
-9.2  
80.9  
1.6  
-8.0  
84.5  
-1.7  
43.9  
48.3  
5.7  
56.4  
47.4  
7.3  
46.0  
52.0  
7.1  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
(
1): Fiscal year from April 1st of year n to March 31st of year n+1  
Favourable external-account dynamics are reducing the sovereign’s  
refinancing risk and currency pressure in the short term but, in the  
medium term, challenges remain unchanged: South Africa absolutely  
needs to strengthen its economic growth potential, which will in turn  
help reduce socio-political risks and improve its public-debt dynamics.  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
EXPORT REVENUE WINDFALL  
NET EXPORTS HAVE DRIVEN THE POST-COVID-19 REBOUND  
Trade balance (RHS)  
Exports  
Imports  
ZAR bn, 3mms  
150  
y/y, 3mma  
1
50  
Real GDP contracted by 7% in 2020, after it grew by a very low 0.8% per  
year on average in 2015-2019. Real GDP collapsed in Q2 2020 (-16.6%  
q/q) due to the lockdown, and has rebounded since mid-2020 (+13.7%  
q/q in Q3; +1.4% q/q in Q4 and +1.1% in Q1 2021), mostly supported  
by monetary and fiscal stimulus policy measures, surging export  
revenue and rebounding production in the mining sector. Meanwhile,  
construction activity and many services sectors relying on domestic  
demand have remained depressed.  
125  
125  
100  
75  
100  
75  
5
0
5
0
50  
2
25  
After falling in April-May 2020, export receipts have rebounded  
vigorously, boosted by recovering volumes and, most importantly,  
soaring prices of exported commodities. Precious metals and mining  
products accounted for 46% of South Africa’s total exports in 2020. Trade  
surpluses have exceeded USD 3.5 bn per month since March 2021 (vs.  
an average of USD 150 m per month in 2019), and the quarterly current  
account balance has been in surplus since Q3 2020. In the very short  
term, export growth performance should remain buoyant.  
0
-
-
25  
-25  
-50  
50  
2
012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
CHART 1  
SOURCE: SARS  
very rapidly in recent days, leading President Ramaphosa to announce  
new restrictions, with the country being moved to an adjusted level-4  
lockdown for at least two weeks from June 28. This is likely to derail the  
economic growth momentum and makes forecasts uncertain pending  
faster progress in the vaccination campaign – at the end of June, only  
DOMESTIC DEMAND RECOVERY IS MORE DIFFICULT  
Helped by monetary and fiscal support measures, household  
consumption has rebounded faster than domestic investment following  
the Covid-19 shock last year. In 2020 as a whole, it contracted by 5.4%  
in real terms. However, it may struggle to continue to recover going  
5
% of the population had received one dose of vaccine, vs. 1.6% at the  
end of May.  
forward. Firstly, South Africa has been facing a third and particularly Secondly, private consumption should remain constrained by last  
severe wave of infections since May. The number of cases has increased year’s sharp deterioration in the labour market; at end-Q1 2021,  
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total employment was still 9% below its end-Q4 2019 level and the  
unemployment rate was 32.6%.  
EASING OF FINANCIAL TENSIONS  
Exchange rate ZAR/USD (LHS)  
Meanwhile, many enterprises have reduced drastically their capital  
expenditure. After already several years of gradual decline, domestic  
investment collapsed by 17% in real terms in 2020, falling to a record  
low of 12.4% of nominal GDP. Corporates remain vulnerable and  
cautious, and wait for much further progress in structural reform.  
More generally, structural brakes on economic growth (such as  
deficient transport and energy infrastructure, corruption and weak  
human capital) will continue to hinder activity; in particular, episodes  
of electricity cuts are expected until at least late 2022 before energy  
supply is durably strengthened.  
2
0
8
14  
13  
12  
11  
10  
9
1
Average yield for government bonds of over 10  
years, % (RHS)  
16  
1
4
2
1
10  
8
On the positive front, the monetary authorities are projected to  
maintain an accommodative policy stance in the very short term, even  
though inflation is starting to accelerate. Consumer price inflation rose  
from 3.1% y/y in December 2020 to 5.2% in May 2021, which is still  
within the central bank’s targeted band of 3%-6%. Since July 2020, the  
policy (repo) rate has been maintained at a record low 3.5% and the  
real prime lending rate has remained close to 3.7%. This has supported  
a small recovery in loans to households in recent months but loans  
to corporates have continued to be weak. As a result, growth in total  
credit to the private sector has turned negative since March 2021  
8
6
7
4
6
2
012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
CHART 2  
SOURCE: SARB  
(
reaching an average -1.3% y/y in March-May).  
liquidity in the domestic financial system, and local banks still keep  
some room to buy more Treasury bonds and offset the impact of lower  
bond holdings by foreign investors (credit to the public sector and  
sovereign bond holdings rose to 17% of bank assets at end-2020 from  
The low interest-rate environment and the extension of credit relief  
and regulatory forbearance measures will anyway continue to help  
corporates and households. When relief measures are unwound,  
sometime in the year ahead, banks’ asset quality is expected to  
deteriorate (the non-performing loan ratio already increased to 5.2%  
at end-2020 from 3.9% at end-2019). The most vulnerable borrowers  
include households (which have a heavy debt burden, at 75% of  
disposable income at end-2020) and small enterprises.  
1
5% in Q1 2020). The share of foreigners stabilized at around 30% of  
total local-currency Treasury bonds since Q4 2020 (down from 37%  
at end-2019). The government is unlikely to need to resort to new  
multilateral loans like in 2020.  
In the medium term, public debt dynamics are a major concern.  
Government debt will continue to grow (we project it to reach 87% of  
GDP at end-FY23/24), driven by wide (even though declining) fiscal  
imbalances and low GDP growth. This will keep the government  
particularly exposed to shifts in foreign investor sentiment and maintain  
pressures on local bond yields. Refinancing risk will trend upwards  
as a result. In order to improve public debt, fiscal consolidation and  
GDP growth prospects, the authorities will have to contain drastically  
growth in the public-sector wage bill, continue to restructure SOEs, and  
On the fiscal front, although some support measures have been  
extended this year, the policy stance will be less supportive to activity  
in 2021 than last year due to the government’s commitment to  
reducing its deficits.  
PUBLIC FINANCE: SHORT-TERM RELIEF, MEDIUM-TERM  
WORRIES  
Public finances weakened significantly due to the Covid-19 shock, make progress in structural reforms. The political context has recently  
following already several years of deterioration. Fiscal slippage improved and become more conducive to such changes, and further  
worsened in 2019 as the government rescued the state-owned energy steps in the right direction have been made (such as SOE management  
company Eskom, and then accelerated drastically in 2020 due to the changes, continued transformation of Eskom, reform measures in the  
economic recession and the large stimulus package (representing about energy sector). However, socio-economic conditions have weakened  
1
0% of GDP). The central government deficit rose to a (lower-than- significantly due to the Covid-19 crisis, and this will continue to make  
expected) 11% of GDP in FY20/21 vs. 6.7% in FY19/20, due to soaring social welfare and public spending reductions particularly difficult.  
levels of primary deficit (6.4% of GDP) and interest payments (4.6%). Moreover, the political landscape might deteriorate again, including in  
National government debt rose to 79% of GDP in FY20/21 from 63% in H2 2021 because of the municipal elections.  
FY19/20. In its budget plan that was published in February 2021, the  
government showed strong commitment to fiscal consolidation efforts  
and projected to reduce its deficit gradually from this year thanks to  
improved revenue and spending discipline.  
Completed on 5 July 2021  
Christine PELTIER  
christine.peltier@bnpparibas.com  
In the short term, the sovereign’s refinancing risk is low even if local  
bond yields are high (averaging 9.8% for government papers of over 10  
years in H1 2021 vs. 9% in H2 2019). First, the government has been  
able to build some buffers in recent months thanks to its smaller-than-  
expected financing needs and continued issuance of domestic bonds  
amid an improved market sentiment. Second, there is abundant  
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