The Middle East Africa (MEA) region will gradually emerge from the challenges brought by COVID-19, growing at 4% YOY in 2021, up from a contraction of 4.3% YOY in 2020. While the Sub-Saharan Africa region includes some smaller markets that have been more insulated from the global economic and pandemic crisis of 2020, all major economies in MEA have seen significant disruptions to their economies. The recovery in 2021 will be very gradual; Q2 2021 should see some uptick in activity as COVID-19 restrictions are lifted and confidence and pent-up demand begins to return. However, a more substantial economic recovery is likely in late 2021, with most economies turning to their pre-pandemic levels of economic size in 2022. Scenario planning, close monitoring of financial risk and enhancements to the offering will be essential to outgrowing market conditions in 2021.
Our analysts are working to bring you our latest insights on the MEA region, preparing you for uncertainty, volatility, and uneven recovery throughout 2021. In this series, we do a deep dive into the key MEA markets that have the largest impact on your business so you can stay ahead of the curve this year. Check out our insights on Turkey healthcare, Israel, Nigeria, and the UAE, and keep an eye on our LinkedIn page for even more insights through the end of January. Keep reading for more on our current view of South Africa’s economy in 2021.
In 2020, South Africa’s economy suffered its worst performance on record, followed by a sharp uptick in activity in the second half of the year, driven by an upswing in exports and the loosening of COVID-19 commercial restrictions that benefited mining, wholesale and retail trade, and manufacturing directly. However, the recovery will lose steam through 2021 because of chronically high joblessness, persistent rolling electricity blackouts, and increasingly fragile public finances that will limit the government’s capacity to stimulate the economy. GDP growth of 3.9% YOY in 2021 will not compensate for the depth of the 2020 recession, and the economy is not forecasted to reach its 2019 size until 2024. To thrive during a prolonged period of low growth, businesses will need to double down on resilient customer segments, capitalize on the boom in e-commerce, and review their value proposition to maximize appeal to cost-conscious customers.
South Africa’s economy will not return to its pre-pandemic size until 2024
The economy is forecasted to grow by 3.9% YOY in 2021 driven by an uptick in private sector demand and stronger exports. However, the outlook is subdued. Weak public finances limit the government’s capacity to stimulate the economy, activity in the crucial tourism industry will remain depressed, and chronic electricity shortages will suppress activity in mining and manufacturing. The economy will remain below its pre-COVID-19 size until 2024.
The government will struggle to overcome fiscal vulnerabilities through the early 2020s
The government will strive to achieve increases in spending in real terms through the mid-2020s. Concurrently, the government will aim to stabilize the debt-to-GDP ratio at approximately 95% by 2025. These goals are likely to be mutually exclusive. The government will struggle to cut the civil service wage bill because of political resistance, but public infrastructure projects will face funding shortfalls, and department procurement budgets will shrink.
Currency stability will improve in 2021, although short-term movements are possible
Supported by higher domestic interest rates, the rand will exhibit greater stability throughout 2021, although gradual depreciation over the course of the year, punctuated by short-term fluctuations, is likely. Increasingly fragile public finances represent a downside risk to the rand, especially if the February 2021 budget speech reveals a significant deterioration in South Africa’s fiscal position. Businesses should prepare for sudden and significant depreciation over the subsequent month.
Actions for Business Professionals
- Invest in e-commerce channels to capture rising online sales activity. Position your products as offering efficiency improvement and cost-cutting solutions.
- Consider targeting companies operating in—or linked to—well-performing industries (e.g., IT and telecoms, financial services, and manufacturing) and industries receiving state support and investment incentives (e.g., export-oriented manufacturing) South Africa’s economy will largely depend on these industries through 2021.
- Focus on building trust with key customers by offering increased value-added services and after-sales support over the long term. Retain and grow market share by doubling down on priority customers and enhancing value proposition using deeper customer insights.
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