HSBC says the boost that SA has received from higher commodity prices, provides the country with a window of opportunity to institute policy reforms needed to kick-start economic growth and remedy record-high unemployment.
Rising prices for commodities including platinum group metals, iron ore, coal and rhodium helped boost mining sales by 10.3% last year, thereby counteracting interruptions in output caused by the onset of the Covid-19 pandemic and subsequent lockdowns, HSBC economist David Faulkner says in a research note.
Mining exports earned the country about R600bn in 2020.
The massive economic boost from commodity exports resulted in a series of substantial trade surpluses that have averaged almost 8% of GDP since the third quarter of last year, supporting the rand and helping to boost tax revenue.
“This creates a window of opportunity for policy reform that starts to address some of the structural constraints to faster economic growth and the factors that undermine fiscal sustainability,” said Faulkner. “After so little progress for so long, in our view, there now appear to be some welcome signs that policy may be starting to move in the right direction. But much more is needed.”
Faulkner said President Cyril Ramaphosa’s recent decision to allow the private sector to generate up to 100MW of energy without a regulatory licence, up from a previous limit of just 1MW, was a positive start as this would boost investment spending. He also highlighted the government’s decision to sell a 51% stake in SAA, which would bring in much-needed private-sector skill and capital while alleviating the strain on the fiscus.
“Economic reforms and an improved political backdrop could help to inspire stronger business confidence and improve longer-term growth and fiscal prospects,” said Faulkner. “But lead-in times for these reforms are long and much more is needed to feel confident that there will be a meaningful pickup in potential growth.”
Despite tentative signs of positive policy reforms the economy remained in a difficult position with unemployment at a record 32.6% in the first quarter and debt servicing costs consuming almost 5% of GDP. That comes in the wake of a 7% contraction in GDP last year, the biggest economic slump in 100 years.
Even so, Faulkner said strength in commodity prices would likely remain supportive of the economy for some time as it would help boost export revenue and result in higher tax revenues for government. Mining has accounted for about 7.5% of GDP and about 45% of exports over the past decade, according to HSBC.
HSBC now forecasts a trade surplus of 6.1% of GDP in 2021 for SA, up from 4.7% of GDP previously, and a revised current account surplus of 2.5% of GDP, which compares with a prior estimate of just 1% of GDP. SA’s economy is expected to grow 4.9% in 2021 and 2% in 2022, according to HSBC.
Despite the positive impact of higher commodity prices Faulkner still highlighted a series of considerable risks facing the economy.
“The pace of vaccine rollout leaves the economy susceptible to further waves of Covid-19, almost one-third of SA workers are jobless, already acute inequality has hardened further, investment spending has collapsed, energy shortages persist and fiscal pressures remain skewed towards more spending,” he said.
HSBC also said it expects consumer inflation to accelerate slightly, largely due to higher oil prices. The bank lifted its 2021 CPI forecast for SA to 4.4% from 4.3%, while its estimate for 2022 was raised to 4.6% in 2022 from 4.5% previously. As a result, it expects the SA Reserve Bank to hike rates by 25 basis points in September and a cumulative 100 basis points in 2022.
“We remain comfortable with our view that the Sarb begins its policy normalisation sooner rather than later with rising inflation expectations the trigger,” said Faulkner.
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