Growth is projected to slump. In the double-hit scenario, a new outbreak affecting South Africa and its trading partner countries will curtail exports, deepening the recession to -8.2% in 2020 and limiting the recovery in 2021, with GDP growth at 0.6%. In the single-hit scenario, where a second wave of the virus can be avoided, economic activity will fall by 7.5% in 2020 before picking up progressively with GDP growth of 2.5% in 2021 (Table 1).

The government relief plan will mitigate the fall in household consumption, but investment, which has been declining over the past two years, will decline to a record low level. The depreciation of the Rand, driven by deteriorating fiscal accounts, will not boost exports as commodity demand remains weak, though prices of some commodities (gold, platinum) are high in the single-hit scenario. High production costs will continue to weigh on economic activity.

Both domestic and global risks weigh on the economic outlook. Domestic near-term risks to growth include load-shedding (rolling blackouts) by the power utility and higher-than-expected electricity prices, which could derail the recovery. By contrast, improvement of business confidence and a faster recovery in Emerging Market countries would have growth spillovers for South Africa, including through higher demand and prices for commodity exports.

Fiscal policy reacted forcefully to the crisis, mobilising ZAR 500 billion (10% of GDP) for new spending, reprioritisation, tax relief and loan guarantees. All social grants were augmented and new schemes designed to provide support to workers including those in the informal sector. Specific schemes were activated targeting businesses in hard hit sectors such as tourism.

The crisis follows a sharp deterioration in fiscal accounts over the past three years. The government deficit is projected to reach 15% of GDP in 2020. Public debt has been increasing in the last decade and is projected to exceed 80% of GDP by 2020. In the absence of consolidation, the debt level will exceed 100% of GDP in 2022, raising sustainability risks in a context of low growth and high government borrowing rates. The fiscal strategy has to sequentially cope, in the short-run, with the impact of the coronavirus and, in the medium-term, implement a bold consolidation to restore debt in a sustainable path while sparing potential growth.

Compensation of government employees is large. At 12% of GDP, the government wage bill is high. Rising wages are driving wage bill increases rather than employment. Wage negotiations have systematically granted above-inflation increases. When compared to OECD and emerging economies, the remuneration level of civil servants is relatively high. The government has announced its intention to reduce the wage bill. The government could consider indexing public sector wages below inflation for 3 years.

Government exposure to state-owned enterprises (SOEs) is high and represents a significant risk to debt sustainability and public finances. The underperformance of SOEs is widespread due to mismanagement, corruption issues, overstaffing and an uncontrolled wage bill. South Africa needs to establish an effective governance framework for SOEs that clearly sets company-specific goals in terms of profitability, capital structure and non-financial objectives.

Supporting the economic recovery in the short-run while undertaking reforms to increase potential long run growth is key. Efforts to improve the business climate, sequencing and prioritisation of reforms will be essential for maximising their growth impact. The tourism sector needs support to weather the effects of the crisis. In the medium term, developing tourism and boosting transport infrastructure investments can contribute to growth and job creation during the recovery. Regulatory restrictions are still relatively high. This includes a high level of government involvement in the economy, barriers to domestic and foreign entry, complex rules for licences and permits, and protection of existing businesses from competition, for instance, in legal services and network industries.

South Africa would benefit from greater integration in global value chains. Participation in global value chains is especially high in the manufacturing industries and could be increased by leveraging the potential of regional value chains. By contrast, the integration of service industries has been held back. South African firms are facing high tariffs in their export markets. Trade facilitation measures should address non-tariff barriers such as improving the quality and access of infrastructure, as well as access to export and insurance credit.

Greener energy policy can bolster growth. South Africa is one of the top-20 greenhouse gas emitters in the world. The CO₂ emission intensity of GDP has fallen slightly since 2000. The introduction of a carbon tax in June 2019 is welcome. The share of renewables in primary energy supply is close to the OECD average. However, coal accounts for 75% of electricity generation and is the main energy source in industrial processes.

Increasing public infrastructure investment would boost potential growth. Public infrastructure investment has declined in recent years. In particular, transport infrastructure remains insufficient and suffers from a lack of maintenance. The government is planning to create an infrastructure fund with the private sector, development finance institutions and multilateral development banks. The success of the infrastructure fund will depend on the capacity to bring in private financing.

Tourism will need prolonged support in the short-run. International tourist arrivals increased from 4.5 million to more than 10 million between 1995 and 2017 and were accompanied by a tripling of employment directly related to tourism. While the role of tourism in the economy has been increasing since the end of apartheid, it remains below the OECD average (Figure 2). Furthermore, the recent COVID-19 pandemic and resulting containment measures have triggered an unprecedented crisis in the tourism sector. Still, the sector offers significant opportunities for an economy with weak growth and high unemployment. Streamlining and implementing electronic visa services for international tourists could increase South Africa’s international openness. Reduction of red tape could strengthen the integration of the tourism sector into local value chains and amplify the impact of tourism on the domestic economy. For tourism to translate into inclusive and sustainable growth, the benefits must spread geographically. Necessary transport and accommodation infrastructure is needed to connect tourists to places.

Land is a main source of inequality in South Africa. Owing to the legacy of apartheid, only a small share of land is under ownership by the black population (Figure 3). The land reform initiated in 1994 – consisting of restitution, tenure reform and redistribution – progressed only slowly. To speed up the process of redistribution, current proposals focus on amending the constitution to allow for expropriation without compensation. A new advisory panel is to ensure a fair and equitable implementation of the land reform process. It is important to clearly define the policy objectives and assess the risks of such an amendment, which could include slower growth as a result of further significant deterioration in perceptions of South Africa’s investment climate if the land reform is not well designed, communicated or implemented.

The current social protection system is incomplete. The social assistance system is well developed and is key in reducing poverty. However, the COVID-19 outbreak has revealed some shortcomings in the coverage of informal workers by the social assistance system and highlighted the disparities in access to quality health care. Also, the current pension system does not sufficiently alleviate the risk of old-age poverty.

Pension coverage is not satisfactory. Only around 40% of employees were contributing to a pension scheme in 2018 and most informal workers are not covered. Pension revenues are not adequate. The fragmentation of the pension system argues for its harmonisation. The government intends to introduce a mandatory pension scheme targeting a replacement rate of 40%, including a universal old-age grant.

Life expectancy has improved in the last ten years from 54 to 63 years but remains low. Death rates remain high by OECD standards. Although total health spending is relatively high (8.1% of GDP), a very large part is funded by private out-of-pocket spending, which leads to unequal access and prevents large population groups from obtaining adequate treatments (Figure 4).

To address the failure of the current health care system to deliver accessible high-quality of care to all, the government plans to introduce a National Health Insurance (NHI) fund and reduce private health insurance. The NHI fund aims to provide universal health coverage by contracting with public and private health care providers based on a large basic basket of health benefits including primary care, emergency and hospital-based services.

In response to the COVID‑19 crisis, closer co‑operation and pooling of available resources between the public and private sectors has been initiated. Most of the intensive/critical care beds are in the private sector. However, in June, the government and the health private sector representatives agreed on fees for COVID-19 patients that are treated in critical care beds in private hospitals.