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Covid-19 hit the economy while growth was already anemic

10 March 2021 – South Africa has been severely affected by the Covid-19 pandemic and reported the highest number of confirmed cases in Africa. Stringent containment measures to curb the spread of the disease helped in saving thousands of lives but they also seriously undermined economic activity. In 2020, the South African real GDP is expected to shrink by -7.8%, the worst economic contraction on the continent. The collapse of both domestic and internal demand and disruptions to global supply chains particularly affected activity in the mining, tourism and hospitability, aviation and retail trade sectors. South Africa’s growth outlook was already weak before the Covid-19 outbreak, with only +0.2% growth in 2019 (+1.1% on average between 2014-2019) due to weak competitiveness and anaemic productivity.  Inefficiencies of the public sector, underinvestment and poor infrastructure particularly in the energy sector, low-skilled human capital and persistent regulatory constraints have been reducing the growth potential of the country (to around +2%) over the past decade. Going forward, weak demand for commodities from China (its main trade partner), record-high unemployment (above 30%) and low consumer confidence are likely to weigh on the recovery: we expect  GDP to rebound by +2.4% in 2021.

Corporate insolvencies in South Africa were on a declining trend between 2009-2018. However, this decline was concealing the continued deterioration of balance sheets in key corporates, particularly in large State-Owned Enterprises (SOEs). In this context, 2019 already marked a U-turn, with a sharp increase in insolvencies by +11% year on year. We expect business insolvencies to increase further in 2020 (+12%) and 2021 (+7%) as a result of the unprecedented Covid-19 shock on the corporate sector. 

The World Bank Doing Business 2020 survey ranks South Africa 84 out of 190 economies (it was 74th five years ago). South Africa still retains a good ranking in the protection of minority investors (rank 13th) and paying taxes (54th). However, recurrent power blackouts, difficulties to start a business (139th) and strong barriers to trade (145rd) are key bottlenecks. Barriers to domestic transactions and to register a property (1068h) are among other key impediments to business activity. Overall rigid product and labor markets deter the competitiveness of the country. Moreover, there are strong barriers to cross-border trade that hinder deeper trade integration with the Southern African area. Source (EulerHermes)