SA can use its clean energy capabilities to overcome its economic challenges

The risks of a global slowdown, together with ongoing local challenges such as severe power cuts, the cost of living squeeze, slow investment, sluggish reforms, extreme weather events and political uncertainty will weigh on South Africa’s growth outlook in 2023. Real GDP growth is expected to slow from an estimated 2.5% in 2022, to 0.3% in 2023 according to estimates released by the South African Reserve Bank (SARB) in January 2023.^[i]

While inflation already quickened towards the end of 2021, since the first quarter of 2022 South Africa’s headline inflation has been driven by global price increases in food and fuel. This has affected the cost of living drastically, with household spending growth in October 2022 estimated to be less than 3% in 2022, and only 1.7% over the three years from 2022 to 2024.^[ii]

Financial stress is a key concern for South Africans, given the cost-of-living squeeze: South African consumers surveyed by Deloitte at the end of December 2022 noted that they are delaying large purchases (50%), feel their financial situation has worsened over the past year (39%), and are concerned about their credit card debt (38%) and about making upcoming payments (25%).^[iii]

Although headline inflation (which peaked at a 13-year high of 7.8% year on year in July 2022^[iv]) is expected to moderate this year as food and fuel prices ease globally, the pressure on core inflation, which has been more subdued,could increase in 2023 as higher input costs are passed on to consumers. For example, producer price inflation for manufactured goods came in at 15% year on year in November 2022.^[v]

Rising inflation saw an aggressive monetary policy tightening cycle (eight consecutive rate hikes since November 2021) by the SARB that is likely to end in the first half of 2023, as inflation is reined in. Yet higher prices, high lending rates, together with softer global commodity prices and the possibility of key advanced economies and trading partners entering a recession in 2023 will be a drag on South Africa’s growth outlook.

Compounding this locally is the difficulty to keep the lights on and power the economy, with disruptions to operations and supply chains as well as limited business confidence delaying investments and net employment creation. In terms of foregone GDP from power cuts, 2022 was South Africa’s worst year on record.^[vi] And with severe power cuts continuing into 2023 – expected by the SARB to reduce growth by as much as two percentage points this year – the need to address this adequately is urgent. So too is the need for implementing growth-enhancing reforms to address structural bottlenecks and to spur expansion in job-creating sectors as unemployment remains unacceptably high (above 30%).

Fortunately, the country’s fiscal position has improved over the past two years. Fiscal consolidation measures such as budget discipline, together with betterthan- expected tax collections, primarily driven by global commodities demand, have brought down the budget deficit. Smaller deficits are forecast for the next three years, with a primary budget surplus (i.e., excluding interest payments) pencilled in for 2023–24.^[vii] Rightfully, the revenue windfalls are being used to reduce elevated government debt and to support reforms at crucial state-owned enterprises. But fiscal risks (on both the expenditure and revenue side) continue to loom.

With a focus on fiscal consolidation, already low public investment has however declined further. Indeed, overall investment has been declining in recent years, with gross fixed capital formation still below pre-pandemic levels. Yet, government spending on infrastructure, including roads, rail, and water projects, is expected to almost double during the 2022–23 to 2025–26 budget period, although from a low base.^[viii] And energy sector reforms under Operation Vulindlela are expected to encourage private investment.

Creating an enabling environment conducive to investment, both domestic and foreign, including political and policy certainty in the run up to the 2024 general elections, will be an important foundation for the structural changes needed in the South African economy in the medium term.

What could be a game changer for the country is leveraging the opportunities linked to its own energy transition goals (a move away from a coal-dominated energy mix while overcoming its power generation shortfalls) as well as supplying and adding value to critical commodities in a global clean energy future. 

On the former, South Africa has massive renewables potential, not only in solar and wind, but also in green hydrogen. On the latter, it also has a notable comparative advantage in supplying key minerals and metals for clean energy applications. For example, this includes platinum group metals (used in catalytic agents in hydrogen electrolysis and fuel-cell applications), vanadium (input for long-duration battery energy storage applications), rare earth elements (used in permanent magnets in the electrical motors of wind turbines and in electronic vehicles [EVs]), and nickel (applications in EVs and battery storage, and hydrogen and geothermal technologies).^[ix] This could help to give rise to new drivers of economic activity, that boost growth, create jobs while also ensuring a just and fair transition towards carbon neutrality.
 
A version of this article was first published on Deloitte Insights and is available here.

[i] South African Reserve Bank, "Statement of the Monetary Policy Committee,26 January 2023”, accessed January 26, 2023.
[ii] National Treasury, “Medium-term budget policy statement – 2022”, accessed November 24, 2022.
[iii] Deloitte, “Global State of the Consumer Tracker”, accessed January 13, 2023.
[iv] StatsSA, "Statistical release: Consumer price index, November 2022", accessed January 13, 2023.
[v] StatsSA, "Statistical release: Producer price inflation, November 2022", accessed January 13, 2023.
[vi] Business Tech, “New data reveals ugly truth about load shedding in South Africa”, October 9, 2022.
[vii] National Treasury, “Medium-term budget policy statement – 2022”, accessed November 24, 2022.
[viii] Ibid.
[ix] Deloitte Africa, "Africa's role in a clean energy future", October 2022.