South Africa’s fiscus could be in a unique position to benefit from the global commodity boom while other economies are suffering the effects of rising inflation due to the ongoing war between Russia and Ukraine.
This is a view that emerged from two separate economic outlook reports today (Thurs) as the global economy is reeling from the effects of the war in Ukraine.
Prices of commodities such as oil, coal, gold have risen to decade highs since last month driven by rising geopolitical tension in the eastern Europe and supply-chain disruptions due to crippling sanctions.
Russia and Ukraine account for a large share of global energy exports, as well as exports of a range of metals, food staples and agricultural inputs.
The Bank of America (BofA) said yesterday that high commodity prices provided near-term upside to South Africa's external, economic growth and fiscal accounts.
BofA sub-Saharan Africa economist Tatonga Rusike said despite imports increasing back to pre-pandemic levels, export prices were higher than pre-pandemic, averaging levels similar to 2021.
“High commodity prices could result in increased metals and mining profits and upward revisions to corporate tax revenue this year.
“However, navigating the expenditure risks from increased social grants and wage bill next year will be key to whether the National Treasury can achieve a primary surplus in 2023, and debt stabilisation in 2024.
However, Rusike warned that South Africa was facing structural constraints to higher economic growth beyond the commodity cycle, with BofA expecting gross domestic product (GDP) growth of 1.8 percent this year.
Rusike said energy supply, logistics, competition and event risks prolonged load shedding, labour strikes and politically induced protests that tap into social tensions could limit the medium- to long-term outlook.
Meanwhile, KPMG’s Global Economic Outlook noted an improvement in South Africa’s terms of trade and relatively large surpluses on the current account in 2020 and 2021 due to a rise in commodity prices.
KPMG South Africa’s lead economist Frank Blackmore said this surplus had also underpinned a relatively resilient local currency and will also contribute to at least 2 percent GDP growth in 2022.
“South Africa is in a unique position having profited from the rise in commodity prices caused initially by Covid-19 supply disruptions and as a consequence of the conflict in Ukraine,” Blackmore said
“The positive balance on the current account resulting from the increased value of commodity exports, although being supportive of the rand, is not large enough to shield South Africa from inflationary increases with inflationary pressures for 2022.
“The global increase in commodity prices, including oil, has meant South Africa is facing rising imported fuel and food production costs.”
The headline consumer inflation rate is expected to increase towards the upper boundary of the central bank’s inflation targeting range of 3-6 percent in 2022 before moving back towards the midpoint of the targeting range in 2023.
KPMG’s report found that though global GDP growth could grow between 3.3 percent and 4 percent this year, in South Africa the forecast was much lower at 1.8 percent in 2023.
Blackmore said a possible convergence back to the average pre-Covid-19 level of 1.7 percent the following year.
“This is driven by insufficient tangible policy action to increase the lower investment and consumption spending caused by a reaction to a number of governance challenges including ongoing policy uncertainty, corruption, ageing infrastructure and continued power shortages, the absence of growth stimulating policy interventions and inadequate levels of service delivery,” he said.