Global Courant
South Africa had a great week on the economic front last week, with Stats SA reporting a significant drop in inflation, the Reserve Bank holding interest rates and the rand finishing stronger against the dollar.
However, economists at the Bureau of Economic Research have raised red flags around two key sectors in the South African economy: mining and agriculture.
In the group’s latest weekly review, economists highlighted mining sector data released last week amid all the good news — particularly profit warnings from some of the country’s largest mining operations.
“A major local tax risk that we have warned about is becoming reality,” the BER said.
“This concerns weaker earnings in the mining sector amid falling SA export commodity prices and poor logistics infrastructure in South Africa.”
Anglo American Platinum (Amplats) and Kumba Iron Ore last week warned that gains in
the six months to the end of June 2023 could fall by 75% and 22% respectively.
“Rising mining profits have been the mainstay of a corporate tax bonanza in 2021 and to a lesser extent in 2022 as well,” the BER said.
“The abrupt change in fortunes poses a major downside risk to corporate tax revenues and overall tax revenues in the current fiscal year (2023/24). This is a key reason why we have been warning for some time that the Treasury will significantly underestimate its February 2023 key budget deficit forecast (3.9% of GDP) for 2023/24.”
The BER noted that, in addition to the negative impact on the economy, mining companies have signaled logistical issues that have had a hard impact on export targets.
“This again highlights that, along with the energy crisis, rail and port problems are increasingly acting as a drag on South Africa’s GDP growth,” the BER said.
The economists have also raised red flags about another development that could hit South Africa later.
The non-renewal of the Black Sea grain deal, which allowed supplies from Ukraine despite the ongoing war with Russia, caused global grain prices to rise this week.
“If this continues, it will also affect local grain costs,” it said.
The grain deal, a ban on the export of certain types of rice from India and probably drier conditions
in the grain-producing parts of South Africa in the coming summer months due to an expected El Niño
weather system, all present “clear upside risks to relatively favorable outlook for SA food
prices,” said the BER.
Good news
Despite mining concerns, the overall result of last week’s string of economic data and activity was positive for South Africa and provided some calm in what has been an incredibly difficult 2023 so far.
Even on the GDP front, South Africa’s Reserve Bank forecasts are slightly up, with the central bank expecting 0.4% growth for the year, moving the country further away from recession.
While risks remain, the BER said this view is consistent with its own modeling, with 0.4% growth pressure expected also for the second quarter of the year.
Inflation is also moving in the right direction.
According to Stats SA, general consumer inflation slowed to 5.4% yoy in June from 6.3% yoy in May – slightly below market consensus.
This gave the SARB’s Monetary Policy Committee (MPC) room to hold interest rates – against many expectations.
“The decision was a close call, with three members voting for no change, while two opted for a 25bp
increase,” the BER noted.
“This marked a remarkable shift from the previous unanimous rate hike of 50 basis points and a series of rate hikes totaling 475 basis points since November 2021.”
The economists said the change in voting is particularly notable as the MPC remained on balance wary of upside inflationary risks, including drier weather negatively impacting local food prices, burden-related costs and higher-than-expected wage increases.
However, despite the risks, the SARB’s outlook indicates that inflation is on a downward path towards 4.5%
However, the central bank warned that the cycle of rate hikes is not over yet – it has just been interrupted – and that future rate hikes could come if inflation does not move in the right direction.
Read: Selling wealthy South Africans to emigrate
