South Africa’s economy has suffered its worst decline in a decade, falling by an unexpectedly poor 3.2 per cent in the first quarter as the country struggles with electricity shortages and mining-industry unrest.
The sharp decline from the previous quarter, much worse than analysts had predicted, is the latest evidence of South Africa’s economic challenges after nearly a decade of corruption and mismanagement under former president Jacob Zuma. It also showed the ineffectiveness of early reforms under Mr. Zuma’s successor, President Cyril Ramaphosa, who took office last year and won an election last month.
South Africa’s economy has stagnated for the past five years, growing at an average of just 1 per cent annually and repeatedly slipping into recession. As one of the biggest and most industrialized countries in Africa, with corporate links to many other African countries, its struggles have been a factor in constraining the average growth rate across the continent.
Under Mr. Ramaphosa’s national economic plan, South Africa needs annual growth of 5 per cent to allow the country to make a meaningful dent in its persistently high unemployment rate of nearly 28 per cent, but its growth this year and next year will be nowhere close to that target. Earlier growth forecasts of 1 per cent for this year are already being revised downward by many economists.
A five-month strike in the gold-mining sector was one of the reasons for the drop in GDP, but the biggest factor was a series of electricity cuts, the worst in a decade. The manufacturing sector fell by 8.8 per cent in the first quarter.
Year-on-year GDP growth was zero in the first quarter, compared to forecasts of 0.7 per cent, and some economists warned that South Africa could have already fallen into a technical recession in the first half of this year, with second-quarter numbers expected to be poor.
South Africa’s currency, the rand, reacted swiftly to the GDP numbers, losing nearly 1.5 per cent of its value.
John Ashbourne, senior emerging-markets economist at Capital Economics, said the GDP decline in the first quarter “will underline the scale of the economic challenge” facing Mr. Ramaphosa. The President “will face increased pressure to push forward with his reform plans,” Mr. Ashbourne said.
The weaker-than-expected growth has led him to cut his full-year forecast from 1.5 per cent to 0.5 per cent, which would be the worst result since 2016. “It is possible that the economy fell into another technical recession over the first half of the year,” he said.
One of the biggest culprits is the state-owned electricity monopoly, Eskom, which has run up massive debts after years of corruption and mismanagement under Mr. Zuma’s administration. The government has been forced to bail out Eskom by taking on more of its debts, while electricity shortages have grown worse.
“Debt pressures are likely to further increase in the near term,” said a statement this week by an International Monetary Fund mission after a one-week visit to South Africa.
“Weak finances and operations of public enterprises, particularly Eskom, represent a major downside risk to growth and the fiscus,” the mission said.
“The fiscal deficit is set to worsen as weak growth constrains revenue, current expenditure remains rigid, and public enterprises require additional support.”
If the Ramaphosa government delays its reform policies, “investment would fail to pick up, economic growth would remain weak in the medium term, and per-capita income would continue to decline,” the IMF mission said.