As the government’s Twenty Year Review notes, South Africa “has emerged from its deeply divided and violent past into a peaceful, robust, and vibrant democracy that has made major strides in improving the lives of its citizens.” Income levels have increased, access to education and health care has improved, and strong institutions and policy frameworks have delivered macroeconomic stability.
Yet the country faces difficult challenges. Real GDP growth is projected to fall to 1.4 percent this year, the lowest since 2010, and recover to only 2.1 percent in 2015, assuming some normalization in industrial relations. About a quarter of South Africans and half of its youth remain unemployed.
The current account and fiscal deficits are elevated relative to other emerging markets. Going forward, the consumption-driven growth model of the past few years is unlikely to be sustainable and headwinds stem from tighter global financial conditions, the uneven global recovery, reduced policy space, and softer commodity prices.
As in many emerging markets, weak external demand and soft commodity prices contributed to South Africa’s economic downturn, but deep-seated structural factors also played an important role. An increase in workdays lost to strikes and increasingly binding supply bottlenecks, especially in electricity provision, were important factors behind South Africa’s growth underperformance, in addition to long-standing rigidities in product and labor markets, poor education outcomes, and apartheid legacies (see chart).
Unless these structural constraints are relieved, South Africa is likely to struggle to grow above 2-2 ½ percent per year, well below what is required to create sufficient jobs to lower unemployment.
Sources of resilience
Poor export performance and robust imports despite a large currency depreciation have kept the current account deficit above 5 percent of GDP. This, combined with low foreign direct investment, makes South Africa vulnerable to a pullback by foreign investors.
After years of accommodation, government debt has risen sharply. These vulnerabilities, however, are mitigated by the floating exchange rate, a favorable currency and maturity composition of debt, and the...